IF YOU COME across a discussion of spending on a personal finance website, you should immediately be on high alert. There’s a good chance you will be scolded for spending too much, and then exhorted to create and follow a written budget.
So let’s start with a basic truth: After exhaustive research, it’s been scientifically established that there are only three people in America who draw up and follow detailed monthly budgets and, no,

THERE IS A CERTAIN pleasure associated with saving for retirement, college or a house down payment. You get that enjoyable sense of progress as you watch your account balances balloon, plus the goals themselves are exciting. There is, alas, no such pleasure when rigging up your family’s financial safety net. It’s all about thinking through the bad stuff that might happen and then playing defense as best you can.
That brings us to a crucial notion many folks fail to grasp: When we talk about protecting loved ones,

BUYING A HOUSE IS the single biggest purchase most of us will ever make—and yet few of us can claim to be experts, because we buy homes so infrequently. Looking to avoid the many pitfalls? With any luck, this chapter will help.

Today’s Housing
Five Reasons to Buy
Five Reasons to Rent
Housing Myths
Real Estate Returns
Leverage
Imputed Rent
Jonathan’s Homes
Buying a Home
Selling a Home
Selling Yourself
Real Estate Agents
Assessing the Market
Remodeling
Rental Properties
Taxes on Home Sales

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EARNING A COLLEGE degree may be an enriching experience that sets you up for a potentially more interesting career. But it’s also a major investment, one that can pay off handsomely by making your human capital—your income-earning ability—more valuable. That bigger paycheck, however, likely won’t come cheap: If you have a newborn, you face four daunting financial tasks, which we tackle in this chapter.
First, you need to save for college over the next 18 years,

IF YOU JUST ENTERED the workforce, it’s time to start preparing for retirement. Over the next four decades, you might pull in tens and perhaps hundreds of thousands of dollars every year. It’s lucky you have all that income coming in, because ahead of you lies life’s toughest financial task: amassing enough money so you can retire in comfort. In dry economic terms, your working career is about accumulating enough financial capital, so that one day you’ll no longer need the income from your human capital.

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FINANCIAL LIFE PLANNER

Step 1: Prep for Success
Step 2: Stockpile Cash
Step 3: Doctor’s Orders
Step 4: Aim to Retire
Step 5: Shed Bad Debt
Step 6: Protect Your Pay
Step 7: Buy a House
Step 8: Plan Your Estate
Step 9: Make Projections
Step 10: Educate the Kids
Step 11: Revamp Insurance
Step 12: Pay Off Debt
Step 13: Quitting Time

PORTFOLIO BUILDER

Step 1: Ask Why
Step 2: Pick Your Provider
Step 3: Cover Cash Needs
Step 4: Off the Shelf
Step 5: Build Your Own
Step 6: Fend Off Inflation
Step 7: Tilt Your Portfolio
Step 8: Add Alternatives
Step 9: Keep Your Balance

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WELCOME TO OUR comprehensive and continuously updated financial guide. Visiting for the first time? You might start with the financial life planner and the portfolio builder. Looking for a particular topic? Check out the table of contents or try the search function. Are you an instructor using the guide with students? Here are some tips.

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Portfolio
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Math
Taxes
Borrowing
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Life Events
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TO SUCCEED AS AN investor, you don’t need to turn yourself into a “quant”—Wall Street lingo for a quantitative investor. But it is helpful to have a grasp of basic investment math, so you appreciate how time can magnify the virtues of saving regularly and investing in the stock market, but also how it can magnify the damage done by high investment costs and an overly aggressive investment strategy.
This might sound daunting. The ideas involved,

IN THE PREVIOUS section, we assumed you didn’t pay the interest on a loan or repay any of the sum originally borrowed. Instead, the amount owed was allowed to balloon in value. This is unrealistic. Most loans are amortizing, meaning that each month you pay not only the interest charged, but also repay part of the sum originally borrowed.
A classic example is a 30-year fixed-rate mortgage. The payment each month stays the same.

YOU CAN THINK of the interested charged by a loan as the mirror opposite of the investment gains on your savings. If you borrow $1,000 and the interest rate is 12% a year, you can calculate the simple interest cost in the same way you would calculate investment gains:
$1,000 x 0.12 = $120 in interest expense
That means that your loan balance after one year would be:
$1,000 x 1.12 = $1,120
Just as investment gains compound over time,

WANT TO KNOW THE expected return for an investment? You might take your cues from the Gordon Equation, named after the late Myron Gordon, a finance professor at the University of Toronto. The equation suggests you can calculate an investment’s expected return by combining two numbers: the income generated by the investment and the expected growth rate in that income.
Let’s say you have a bond that yields 3%. You can’t expect that 3% yield to grow,

AN INVESTMENT’S performance often has two components: the capital gain or loss and the income generated. For instance, one of your stocks might gain in price, while also paying you a quarterly dividend. Similarly, mutual fund owners need to consider not only share price changes, but also the income and capital gains distributions that they receive throughout the year.
By combining an investment’s price change and the income it generated, you can calculate the investment’s total return.

EVEN IF WE CLOCK investment gains, we may not be making any financial progress if our investment gains aren’t outpacing the twin threats of inflation and taxes. For instance, if we earn 3% this year but inflation is running at 5%, we’re losing money—and the loss would be even greater once we factor in taxes.
In the previous section, we saw that a 5% investment loss was more damaging than 5% inflation. Earlier, we also saw that the punishment from a 25% investment loss was greater than the benefit from a 25% investment gain.

THIS IS A SOMEWHAT nerdy point, but the loss from inflation is slightly different from an investment loss. To understand why, suppose you have $1,000 and your favorite candy bar increases in price by 5%, from $1 to $1.05.
Previously, your $1,000 would have bought 1,000 candy bars at $1 each. If the price increases by 5% to $1.05, you might imagine that you have suffered a 5% loss of purchasing power, and thus your $1,000 would buy just 950 candy bars.

WHEN SAVING FOR retirement, the combination of investment gains and regular savings can produce impressive results. But once you retire, this winning combo turns into a tug-of-war. Instead of adding savings to your portfolio, you’re making withdrawals—and your annual withdrawals will often be greater than your portfolio’s annual investment gains. The big question: How long can you sustain this losing battle before running out of money?
You can run a simple scenario at Dinkytown.net using the calculator labeled “How long will my retirement savings last?” Keep in mind that this calculator assumes you earn the same return every year.