stocks

6 Best Investments for Roth IRA in 2023

One of the very best investment vehicles to prepare for retirement is a Roth IRA. It gives you an opportunity to provide tax-free income once you retire. But a Roth IRA itself is not an investment. That’s why it’s important to know the best investments for a Roth IRA in 2023. The table below summarizes […]

The post 6 Best Investments for Roth IRA in 2023 appeared first on Good Financial Cents®.

Money in a Minute for the Week Ending Jan. 7

Here’s a quick look at the biggest financial news of the week.

We didn’t start the FIRE: The true history of financial independence

I used to be a collector. I collected trading cards. I collected comic books. I collected pins and stickers and mementos of all sorts. I had boxes of things I’d collected but which essentially served no purpose.

I can’t say I’ve shaken the urge to collect entirely, but I have a much better handle on it than I used to. A few years ago, I sold my comic collection and stopped obsessing over them. Today, I collect three things: patches from the countries I visit, pins from national parks, and — especially — old books about money.

Collecting old money books is fun. For one, it ties to my work. Plus, there’s not a huge demand for money manuals, so there’s not a lot of competition to buy them. (Exception: As much as I’d love a copy of Ben Franklin’s The Way to Wealth, so would a lot of other people. That one is out of my reach.)

One big bonus from collecting old money books is actually reading these books. They’re fascinating. And it’s interesting to trace the development of certain ideas in the world of personal finance.

For instance, there’s this persistent myth of “lost economic virtue”. That is, a lot of people today want to argue that people were better at managing their money in the past. They weren’t. Debt (and poor money skills) has been a persistent problem since well before the United States was founded. It’s not like we, as a society, once had smart money skills and lost them. The way people manage money today is the way they’ve always managed money.

Or there’s the notion of financial independence (and the closely-related topic of early retirement). The standard narrative goes something like this:

  • In 1992, Joe Dominguez and Vicki Robin published Your Money or Your Life, and that marks the “discovery” of FIRE.
  • In the late 2000s, Jacob from Early Retirement Extreme picked up the FIRE banner, then handed it off to Mr. Money Mustache a few years later.
  • Today that banner is being carried by newcomers like Choose FI and the /r/financialindependence subreddit.

When you read old money books, however, you soon realize that FIRE isn’t new. These ideas have been kicking around for a while. Sure, the past decade has seen the systemization and codification of the concepts, but people have been preaching the importance of financial independence for about 150 years. Maybe longer.

Today, using my collection of old money books, let’s take a look at where the notion of financial independence originated.

The Pros and Cons of Dividend Stocks for Retirement Savings

With savings accounts paying less than a 1% return, dividends can provide a steady stream of cash without having to dip into your principal.

How to Prequalify for a Home Loan

First Step to Homebuying: Pre-Qualify for a Home Loan Purchasing a home can be an exciting journey. Of course, before you get to experience the joy of unlocking your front door for the very first time, there are some tasks that you’ll need to take care of along the way. For most homebuyers, this includes securing a home loan. As you prepare to purchase a mortgage, one of your first steps might be to pre-qualify for a home loan. What Does It Mean to Pre-Qualify for a Loan? Mortgage pre-qualification involves working with your lender to determine how much a home loan you can afford. The lender will review your financial history and possibly take a look at some relevant documentation and provide you with an informed estimate of how much money you may be able to borrow. You may also wish to take this opportunity to become more familiar with your mortgage options, and to get a tighter rein on your budget. However, it’s important to recognize that when it comes to pre-qualification, mortgage lenders are not guaranteeing that you will be approved; they are only verifying your ability to take on mortgage payments and giving you a clearer idea of how much of a mortgage you may be able to afford. You and your real estate agent can then use this informal evaluation to refine your search to properties that are within your expected budget range. Mortgage Pre-Qualification vs. Pre-Approval Although the terms pre-qualification and pre-approval are sometimes used interchangeably, they are not exactly the same thing. Mortgage pre-qualification is a less conclusive process. Lenders may be willing to accept self-reported information rather than requiring official documentation or performing a check on your credit history. Pre-qualification is essentially a ball-park estimate. Borrows who pursue loan pre-qualification may receive a pre-qualification letter which they can share with real estate agents or home sellers as proof that they are working with a licensed lender. Pre-approval, on the other hand, is more official. In fact, you can think of pre-approval as the closest thing to actually finalizing a mortgage contract; you will work with the lender to complete a mortgage application, and your lender will review your financial documentation, most likely including recent pay stubs, bank statements, tax returns, and statements for any additional assets you may have (such as stocks, bonds, IRAs, and 401Ks). This will give the lender a clear picture of your finances and capabilities. Although mortgage pre-approval does not necessarily mean that the loan is finalized or that it will go through, it is still a major step in that direction. As such, many sellers will prioritize accepting offers from potential buyers who have been pre-approved over those who are merely pre-qualified. What Information Do I Need to Pre-Qualify for a Home Loan? Because pre-qualification is an informal process, there are no agreed-upon requirements; different lenders will ask for different forms of documentation or pose different questions related to your current and past finances. Some lenders may wish to perform a credit check before they pre-qualify you for a loan, while others will be content to take you on your word. That said, the more information that your lender can review, the more accurate estimate they can provide. If you are interested in getting pre-qualified, discuss with your lender to determine what information they will need. In many cases, lenders will ask you to self report the necessary information, which means that you won’t need to share specific documentation (although you will likely want to have that documentation handy so that your answers can be as accurate as possible). How Long Does Pre-Qualification Take? Pre-qualification is a relatively painless process that can be completed within a day or two – or even in as little as an hour. Some lenders may wish to meet you in person, while others will likely be willing to help you pursue pre-qualification over the telephone or via an online meeting. However, if you are interested in getting pre-approved instead of pre-qualified, you can expect a longer turnaround time. Because pre-approval is an official process that requires you to submit documentation and undergo a credit check, you can help speed the process along by having all of your information ready and available before you get started. The Perks of Pre-Qualification Although pre-qualification does not necessarily mean that your lender will approve your loan, it does give you an idea of how much money you may be able to borrow. This allows you to move forward on your home-purchasing journey with confidence that the properties you are viewing are within your estimated budget range. If you’d like a clearer idea of how much money you may be able to borrow on a home loan, check out the Pennymac mortgage calculator. And, if you have other questions about how to get started finding the right home for you, talk to a Pennymac loan officer today!

Which financial advice should you trust?

Commenting on a recent article, Carmine Red asked an excellent question:

How do you evaluate the financial advice you get from other sources? Specifically, how do you decide if some piece of advice is for you, or if you should discard some adjacent advice. Is there an amount of pick-and-choose?

GRS definitely doesn’t seem like a dogmatic 100% one-way-of-doing things site, so I’d love to hear about the critical thinking you employ, and that I’m sure we can all use a little of since we’re getting bombarded by financial “do this!” or “don’t do this” instructions from so many different dimensions.

Carmine is right: GRS is not dogmatic. From the start, my top admonition has been “do what works for you”. By this I mean that you should test financial advice to see if it works for you and your situation. There’s little (if any) advice that applies to 100% of people in 100% of cases. Life is messy. Money is messy.

So, how can you decide whom to trust? How can you evaluate a piece of financial advice to decide whether it has merit? And if the financial advice does have merit, how can you tell if it’s right for yor life?

Today, let’s take a deep dive into this question. Let’s explore how to evaluate all of the financial advice you get — from the internet, from television, and in real life.

How to Evaluate Financial Advice

Before I answer Carmine’s question directly, I want to approach it obliquely. If you find this section boring, please skip to the next one. I won’t hold it against you!

In 1940, Mortimer J. Adler published How to Read a Book, which contained 400 pages of advice on doing something that most people would argue needs no instruction. In 1967, he revised the book and turned it into a little masterpiece.

In the revised edition, Adler argues that there are four levels of reading:

  1. Elementary Reading. At this basic level, the reader is able to answer the question, “What does the sentence say?” But reading at this stage is a mechanical act.
  2. Inspectional Reading. At this level, a reader’s aim is to get the most from a book (or article) in a minimum of time. “Inspectional reading is the art of skimming systematically,” Adler writes. Your aim is to get a surface understanding of the book, to answer the question, “What is this book about?”
  3. Analytical Reading. At this level, you’re doing the best, most complete and thorough reading of a book that you can do. Inspectional reading is done quickly. Analytical reading is done without a time limit. Its aim is understanding. This is the sort of reading that most of us do most of the time.
  4. Synoptical reading. At the fourth (and highest) level of reading, we read comparatively. “When reading synoptically,” Adler says, “the reader reads many books, not just one, and places them in relation to one another.” My ongoing project to read about the history of retirement? That’s synoptic reading.

What has this to do with evaluating financial advice? Well, I think similar principles apply. When you receive a piece of financial advice from somebody, or you read a recommendation online, there are four levels of evaluation.

  1. Elementary evaluation. When you pick up a piece of financial advice, start by asking yourself “What does this advice say?” You’re not trying to judge its merits. You’re merely trying to parse the recommendation. Believe it or not, you can throw some stuff out at this level because it doesn’t say anything. Or what it says is nonsensical. (I don’t mean nonsensical as in “I disagree with it”. I mean nonsensical as in it literally makes no sense.)
  2. Inspectional evaluation. Next ask, “What is this advice about? What is the overall message? What is its core argument?” You’re not trying to understand nuance here. You’re trying to get the main point. For instance, in Mr. Money Mustache’s popular article “The Shockingly Simple Math Behind Early Retirement”, the core argument is “the more you save, the sooner you can retire”. The main point of the article you’re reading right now is: “There are smart ways to evaluate financial advice. Here are a few.”
  3. Analytical evaluation. The biggest part of evaluating financial advice is taking time to analyze it, to examine the advice in detail, to really understand it. This usually means asking “why?” Why is the person giving this advice? What’s their motivation and what does this advice aim to accomplish? (The rest of this article offers some tips for applying this step.)
  4. Synoptical evaluation. Lastly, if you’re evaluating important advice (such as how much to spend on a house), you should make time to do some comparative evaluation. What do other people have to say? Why do they agree? Why do they disagree? How does this advice fit in to what you already know and what you’re already doing?

Here at Get Rich Slowly, one of my primary aims is to “evaluate synoptically”. I don’t want this site to be one-dimensional. When I write my articles, I try my best to draw from a variety of disciplines and sources. I look for differing opinions. Does that mean I stray from strict personal finance sometimes? Yes, absolutely. But it makes the writing more interesting for me and, I hope, for you.

Okay, that’s some semi-helpful, high-level philosophical stuff about evaluating financial advice. Now let’s look at how to put this into practice. How do you actually analyze financial advice to decide whether it’s good or not?

I think it helps to ask four questions.

Which financial advice should you trust?

Commenting on a recent article, Carmine Red asked an excellent question:

How do you evaluate the financial advice you get from other sources? Specifically, how do you decide if some piece of advice is for you, or if you should discard some adjacent advice. Is there an amount of pick-and-choose?

GRS definitely doesn’t seem like a dogmatic 100% one-way-of-doing things site, so I’d love to hear about the critical thinking you employ, and that I’m sure we can all use a little of since we’re getting bombarded by financial “do this!” or “don’t do this” instructions from so many different dimensions.

Carmine is right: GRS is not dogmatic. From the start, my top admonition has been “do what works for you”. By this I mean that you should test financial advice to see if it works for you and your situation. There’s little (if any) advice that applies to 100% of people in 100% of cases. Life is messy. Money is messy.

So, how can you decide whom to trust? How can you evaluate a piece of financial advice to decide whether it has merit? And if the financial advice does have merit, how can you tell if it’s right for yor life?

Today, let’s take a deep dive into this question. Let’s explore how to evaluate all of the financial advice you get — from the internet, from television, and in real life.

How to Evaluate Financial Advice

Before I answer Carmine’s question directly, I want to approach it obliquely. If you find this section boring, please skip to the next one. I won’t hold it against you!

In 1940, Mortimer J. Adler published How to Read a Book, which contained 400 pages of advice on doing something that most people would argue needs no instruction. In 1967, he revised the book and turned it into a little masterpiece.

In the revised edition, Adler argues that there are four levels of reading:

  1. Elementary Reading. At this basic level, the reader is able to answer the question, “What does the sentence say?” But reading at this stage is a mechanical act.
  2. Inspectional Reading. At this level, a reader’s aim is to get the most from a book (or article) in a minimum of time. “Inspectional reading is the art of skimming systematically,” Adler writes. Your aim is to get a surface understanding of the book, to answer the question, “What is this book about?”
  3. Analytical Reading. At this level, you’re doing the best, most complete and thorough reading of a book that you can do. Inspectional reading is done quickly. Analytical reading is done without a time limit. Its aim is understanding. This is the sort of reading that most of us do most of the time.
  4. Synoptical reading. At the fourth (and highest) level of reading, we read comparatively. “When reading synoptically,” Adler says, “the reader reads many books, not just one, and places them in relation to one another.” My ongoing project to read about the history of retirement? That’s synoptic reading.

What has this to do with evaluating financial advice? Well, I think similar principles apply. When you receive a piece of financial advice from somebody, or you read a recommendation online, there are four levels of evaluation.

  1. Elementary evaluation. When you pick up a piece of financial advice, start by asking yourself “What does this advice say?” You’re not trying to judge its merits. You’re merely trying to parse the recommendation. Believe it or not, you can throw some stuff out at this level because it doesn’t say anything. Or what it says is nonsensical. (I don’t mean nonsensical as in “I disagree with it”. I mean nonsensical as in it literally makes no sense.)
  2. Inspectional evaluation. Next ask, “What is this advice about? What is the overall message? What is its core argument?” You’re not trying to understand nuance here. You’re trying to get the main point. For instance, in Mr. Money Mustache’s popular article “The Shockingly Simple Math Behind Early Retirement”, the core argument is “the more you save, the sooner you can retire”. The main point of the article you’re reading right now is: “There are smart ways to evaluate financial advice. Here are a few.”
  3. Analytical evaluation. The biggest part of evaluating financial advice is taking time to analyze it, to examine the advice in detail, to really understand it. This usually means asking “why?” Why is the person giving this advice? What’s their motivation and what does this advice aim to accomplish? (The rest of this article offers some tips for applying this step.)
  4. Synoptical evaluation. Lastly, if you’re evaluating important advice (such as how much to spend on a house), you should make time to do some comparative evaluation. What do other people have to say? Why do they agree? Why do they disagree? How does this advice fit in to what you already know and what you’re already doing?

Here at Get Rich Slowly, one of my primary aims is to “evaluate synoptically”. I don’t want this site to be one-dimensional. When I write my articles, I try my best to draw from a variety of disciplines and sources. I look for differing opinions. Does that mean I stray from strict personal finance sometimes? Yes, absolutely. But it makes the writing more interesting for me and, I hope, for you.

Okay, that’s some semi-helpful, high-level philosophical stuff about evaluating financial advice. Now let’s look at how to put this into practice. How do you actually analyze financial advice to decide whether it’s good or not?

I think it helps to ask four questions.