What Is Valuation-Informed Indexing?

Valuation-Informed Indexing is the approach to investing that I developed as a result of my mid-1990s research into what the historical stock-return data says about how to invest successfully for the long term. My bare-bones understanding of what the data says was greatly enhanced by the investing discussions held by the Financial Freedom Discussion-Board Community from May 13, 2002, forward, collectively referred to as The Great Safe Withdrawal Rate Debate.

Rob Bennett Investing Strategy

Scores of community members contributed to the effort, as did a number of investing experts from outside our community whose views we either solicited or consulted at various stages of the debate. John Walter Russell (owner of the Early-Retirement-Planning-Insights.com site) offered such outstanding community service over so long a period of time that he should be viewed as co-developer of this exciting new investing approach. Please understand, however, that the words below are mine alone and that Russell, the other community members, and the experts who contributed to the development of the concept do not share all of my investing views.

Set forth below are brief descriptions of the twelve key tenets of the Valuation-Informed Indexing investing approach.

The first tenet of Valuation-Informed Indexing is that planning is key to effective money management.

I put my faith in the conventional investing wisdom prior to the mid-90s, when I was putting together my plan for making a transition from the world of corporate employment to the far-more financially uncertain path of a freelance writer of nonfiction books. Given my family responsibilities, it was not possible for me to make that transition without first putting into place reliable income streams that would cover the essential spending categories in my budget–categories like housing and groceries and health insurance. It was my need to plan for this form of early “retirement” (from only those aspects of the work experience that I did not enjoy) that caused me to examine the historical stock-return data on my own rather than taking what I picked up from listening to the conventional stock-market investing advice on faith.

Those seeking financial freedom early in life must plan. That is the most basic rule of all. Planning is what makes you an effective saver. Planning is what makes you an effective investor. The reason why so many middle-class workers fail to obtain full value from their earnings is that they are not motivated by the conventional money advice to plan. Planning is what makes those who congregate at this site and at our community boards different from those who do not.

Valuation-Informed Indexing is a planner’s approach to investing. The primary reason why so many other middle-class investors find the conventional investing strategies “good enough” is that they are not planning to win financial freedom early in life. It is the drive to enjoy the benefits of effective money management well before turning 65 that drives Passion Savers to come up with something better.

In the investing area, the Valuation-Informed Indexing strategy is the tasty fruit of that all-important drive that we feel so much more than most others to plan our financial futures. This means that, as we evaluate new ideas, our focus is often on how they will serve our common desire to plan effectively.

The second tenet of Valuation-Informed Indexing is that planning must be at least partly numbers-based.

Valuation-Informed Indexing

There are many considerations that must be taken into account in writing an investment plan. You need to form an assessment of your risk tolerance. You need to take into account whether you can count on a pension or on Social Security to cover some of your living expenses. If you are married and can in a pinch take advantage of the earnings of a spouse, that makes a difference. If you have children and hope to be able to pay for their college educations, that makes a difference. And so on.

Ultimately, all of these considerations must be reduced to numbers to be reflected in your Passion Saving plan.

There’s no getting around it.

It’s hard to reduce all of the various considerations to numbers. You don’t really know how much college is going to cost and you don’t really know how much you will obtain from Social Security. But if you are completely unable to assign numbers to the factors affecting your plan, you cannot assemble a plan that will do the job that you need your investing plan to do. The numbers assigned to many of the elements of your plan will be nothing more than educated guesses. But there must be numbers assigned to them for them to be taken into consideration in the investing plan at all.

The third tenet of Valuation-Informed Indexing is that the historical stock-return data provides the best numbers-based guidance available on how stocks will perform in the future.

It was the need for numbers-based planning that caused me to turn to the historical stock-return data for help in putting together the investing side of my Passion Saving plan. The historical data provides guidance that permits you to translate your vague and uncertain investing theories into hard and objective numbers.

The historical data does not provide perfect guidance. It would be good if we had a larger data set. It would be good if we knew for certain that stocks will perform in the future as they have in the past. It would be good if there were no anomalies in the data set. Still, we have no choice but to make use of the data set we have. There is no better source of guidance available for us to make use of in trying to form realistic expectations of what sorts of income streams our investments will generate for us.

Our data set is flawed. It is the best data set we have available to us. We must never lose sight of the flaws when stating our findings. We must never lose sight of the reality that the flawed data set available to us is the best source of guidance we possess all the same.

The fourth tenet of Valuation-Informed Indexing is that it is far too soon in our examinations of the historical data to be reaching dogmatic conclusions.

The Stocks-for-the-Long-Run Investing Paradigm is the dominant investing paradigm of our day. It is a paradigm that offers great insights. It is also an investing paradigm that is terribly flawed. The worst mistake that has been made by those who have advocated the Stocks-for-the-Long-Run Investing Paradigm has been their inclination to engage in excessive dogmatism. Those of us seeking to develop a new Data-Based Paradigm need to work hard to avoid that mistake.

Are stocks a wonderful investment class? The historical data indicates that stocks are indeed a wonderful investment class. Are stocks always the best place to put all of your money? The historical data indicates that stocks are not always the best place to put all of your money. Is short-term timing difficult to pull off profitably? The historical data indicates that short-term timing is indeed difficult to pull off profitably, but that long-term timing is not nearly so difficult to pull off profitably.

The New Buy-and-Hold

Over and over again we see the same pattern play out in pronouncements made by advocates of the Stocks-for-the-Long-Run Investing Paradigm. What often happens is that a valuable insight is developed and then exaggerated to a point where its value is put into question or to a point where the advice following from the insight is actually so misleading as to be dangerous to the investors making use of it. The now-dominant investing paradigm is a paradigm rooted in half-truths.

Valuation-Informed Indexing is a non-dogmatic investing approach. Those of us following this approach aim not to be so open-minded that our brains fall out. But we also aim for humility. One thing we know from the historical data is that too-readily-accepted investing wisdom is foiled again and again and again. We aim to put forward non-dogmatic descriptions of the insights we uncover and develop and sharpen together.

Should most investors lower their stock allocations at times of extremely high valuations? The historical data says “yes.” Should all investors sell all of their stocks each time valuations go a little above the moderate range? That’s far too dogmatic a statement for Valuation-Informed Indexers to endorse.

These are all sorts of questions that we are only beginning to research. We are very much in the early innings of this ballgame. We know what we know. But one of the things we know is that there is a lot that we do not yet know.

The fifth tenet of Valuation-Informed Indexing is that it is important to distinguish between the Accumulation Stage of our investing life-spans and the Distribution Stage of our investing life-spans.

The annualized long-term real return on stocks is a number a bit below 7 percent. Does it follow that it is safe to take a withdrawal rate of 7 percent in retirement? It does not. In retirement, you are in the Distribution Stage of your investing life plan, a stage in which you are taking from the portfolio rather than adding to it. During the Distribution Stage, sharp drops in stock prices do far more damage than they do during the Accumulation Stage.

The most important contribution of the conventional methodology safe withdrawal rate studies (The Trinity study and its progeny) is their data-based demonstration of the distinction between the Distribution Stage and the Accumulation Stage. William Bernstein, author of The Four Pillars of Investing, referred to the Trinity study as “breakthrough research” for the help it provided investors in making the critical importance of this distinction clear. He was right to do so.

One cannot say that because the safe withdrawal rate (a Distribution-Stage concept) at a given valuation level is 2 percent that the expected real return for those in the Accumulation Stage is 2 percent. One cannot say that because a realistic real-return expectation for those in the Accumulation Stage at a given valuation level (and for a specified time-period) is 9 percent that the safe withdrawal rate is 9 percent. The realities of the Accumulation Stage and of the Distribution Stage are not the same (there are some realities that the two stages have in common, of course).

The sixth tenet of Valuation-Informed Indexing is that in the real world (in contrast to the theoretical world studied by academics) the distinction between the Accumulation Stage and the Distribution Stage is not always entirely clear.

An Investing Strategy That Works

I count on the earnings from my investments to cover some of my costs of living in years in which my writing income is not sufficient by itself to do so. The income I bring in from my writing work will likely be enough in some years for me to add to my portfolio rather than to need to subtract from it. Am I in the Accumulation Stage or in the Distribution Stage?

I have one foot in both stages. That’s true for a lot of folks, although generally to a lesser extent than it is for me. The line between the Distribution Stage and the Accumulation Stage is often not a thick bold line.

If you retire at age 60 and expect to begin receiving a pension at age 65, you are not entirely in the Distribution Stage in regards to the portfolio amount you had in your possession on the day you retired. In five years, a new income stream will come into effect to help you cover your living costs. You need to make adjustments to safe withdrawal rate analyses for them to be meaningfully applicable to your particular circumstances.

If you are age 40 and seeking to retire at age 50, you do not hold the attitudes toward potential investing outcomes that the conventional safe withdrawal rate studies presume are held by investors in the Accumulation Stage. The presumption is that the investor feels no concern about short-term drops in the value of his portfolio, that even a halving of his portfolio will not prompt him to sell any shares. Someone with a desire to within 10 years put the income streams generated by his portfolio to use covering his costs of living is probably not emotionally prepared to endure a 50 percent drop in his portfolio value without flinching. He needs to modify the lessons of the historical data to make them applicable to his particular circumstances.

The seventh tenet of Valuation-Informed Indexing is that the conventional safe withdrawal rate methodology is analytically invalid for purposes of determining safe withdrawal rates.

The conventional safe withdrawal rate methodology studies constituted breakthrough research. That said, they did not constitute accurate research. All conventional studies get the safe withdrawal rate number wrong.

The error was not intentional. But it was serious. For retirements beginning in January 2000, the conventional studies show a safe withdrawal rate of 4 percent for a portfolio comprised of 80 percent S&P stocks and 20 percent short-term Treasuries. The number you get from an analytically valid study of the historical data is 1.6 percent. That’s a difference between a retiree handing in his resignation with $1.5 million saved living the last 30 years of his life on $60,000 per year and living the last 30 years of his life on $24,000 per year. That’s no rounding error.

Research-Based Investing Strategy

The conventional safe withdrawal rate methodology is analytically invalid for purposes of determining safe withdrawal rates because it fails to take into account the critical factor of changes in valuation. The historical data shows that valuation changes are the most important factor that goes into determining safe withdrawal rates. It is not possible to calculate the number accurately at times of low or high valuation without taking the valuation factor into account.

The Valuation-Informed Indexing approach is a non-dogmatic approach. It is too early in the game to say which of the various analytically valid approaches that we have examined so far will prove to be the best. It is not too early, however, to declare that valuation has an effect and thus must be taken into account in some way. Bernstein says that valuations affect long-term returns as a matter of “mathematical certainty.” That’s as strong a phrase as could possibly be used, and all of the research that has been put forward during the first 41 months of the Great Safe Withdrawal Rate Debate backs up Bernstein on that point.

The conventional safe withdrawal rate studies calculate the Historical Surviving Withdrawal Rate (HSWR), not the Safe Withdrawal Rate (SWR). The HSWR can be used as a not-too-bad approximation of the safe withdrawal rate at times of moderate valuation. At times of low or high valuations, use of an analytically valid safe withdrawal rate analysis is required for Passion Savers seeking to put together an investing plan helping them to achieve financial freedom early in life.

The eighth tenet of Valuation-Informed Indexing is that valuations matter.

The point of Valuation-Informed Indexing is, just as the name suggests, to take valuations into account when developing investing strategies. Stocks provide a far better long-term value proposition when purchased at times of low or moderate valuations than they do when purchased at times of high valuations.

Valuation-Informed Indexing not only permits you to avoid the full hit experienced by other investors when stock prices take a big drop. Valuation-Informed Indexing also permits you to buy more stocks when their prices are appealing. Valuation-Informed Indexing is a win-win investing approach, presuming that stocks perform in the future much as they always have in the past.

Take valuations into account when setting your portfolio allocations, and you will likely attain financial freedom many years sooner than you would have had you failed to take valuations into account. That’s why the Valuation-Informed Indexing approach is the focus of most investing articles published at the PassionSaving.com site.

The ninth tenet of Valuation-Informed Indexing is that there is no one optimal stock allocation.

Shiller Investing Strategy
One of the ideas you sometimes see put forward by advocates of the Stocks-for-the-Long-Run Investing Paradigm is that it is possible through manipulations of numbers to determine the best stock allocation for all investors at all valuation levels. It’s not so, at least not according to the historical stock-return data.

Valuation-Informed Indexing is a customized investing approach. It is an approach for investors who understand that they will likely obtain more value for their investing dollar by crafting plans that make sense for their particular life circumstances rather than making use of prefab investing strategies purporting to be effective across-the-board.

The tenth tenet of Valuation-Informed Indexing is that a revolution is needed in our understanding of what sorts of investing strategies are most likely to lead to long-term investing success.

Please take a look at this article to read the argument for why Valuation-Informed Indexing is rooted in a rejection of the conventional stock market investing advice of today.

The eleventh tenet of Valuation-Informed Indexing is that buy-and-hold investing is a far more complicated and difficult (but effective!) strategy than it is often portrayed to be.

The article linked to above includes a discussion of why buy-and-hold investing is more difficult to pull off than many today realize, and why the Valuation-Informed Indexing approach places a focus on learning what it takes to engage in realistic buy-and-hold strategies.

The twelfth tenet of Valuation-Informed Indexing is that the primary driver of investing decisions is emotion, not reason.

Are investors all acting rationally to pursue their self-interest? Is the market efficient (as that term is commonly understood)? The answers are “no” and “no.”

Investors are rational in many ways, of course. And the market appears to be efficient in some important respects too. But valuations would not reach the extreme levels at which they are at today if the markets were entirely efficient. And investors would adjust their portfolio allocations when valuations went to such high levels if investing were an entirely rational process.

Emotions always come into play when you make investing decisions. We saw that clearly during The Great Safe Withdrawal Rate Debate when defenders of conventional safe withdrawal rate studies engaged in all sorts of highly emotional claims to frustrate our community’s desire for reasoned debate on what the historical data really says about how to invest successfully for the long term.

Our community is comprised of some of the greatest savers in the world. We have more to invest than most. So we have more at stake than most in the project of coming to an accurate understanding of what the historical data says. Yet many community members directed large amounts of their life energies into blocking the discussions rather than adding constructively to them.


Value Investing for the Middle-Class
A review of the Post Archives shows that it is an emotional desire not to acknowledge the errors of failed and failing investing strategies that was the driving force behind many defenses of the conventional methodology studies. The safe withdrawal rate is a data-based construct. If the data does not support the findings of a methodology, there is obviously a serious problem with that methodology. There are serious problems with the conventional methodology. But it is hard for a good number of investors who experienced success using the Stocks-for-the-Long-Run Investing Paradigm to acknowledge those problems.

Valuation-Informed Indexing is a numbers-based approach to investing. It is a reasoned approach to investing. But those of us making use of this approach do not pretend for 10 seconds that we are above the emotion-related influences that have so many times in the past crushed the investing dreams of middle-class workers. We use what we learn from our analyses of the historical data to rein in our emotions, to help us to invest at least a bit more rationally than we otherwise could.

We don’t always get it right. Advocates of Valuation-Informed investing need to be wary of being betrayed by our emotions, as have so many of the advocates of the Stocks-for-the-Long-Run paradigm. At least we are aware of the dangers and are putting a serious effort into the project of overcoming them. That is the defining characteristic of this exciting new approach to investing. We acknowledge the power of emotion in the investment decision-making process, and are doing what we can to come to terms with it and even to transform it into a positive.

Saving and Investing Go Together Like a Horse and Carriage

Saving and investing go together like a horse and carriage because frugality always matters.

My posting days at the Retire Early boards can be divided neatly into two periods. In the time-period prior to my May 13, 2002, post on the realities of safe withdrawal rates, I was the most loved poster in the community. In the time thereafter, as my focus shifted from saving to investing, I became the most hated. Neat trick, huh?

Saving and Investing

In my mind, my two posting careers are two sides of a single coin. The common thread is a desire for an efficient use of resources. No one viewed it as “controversial” when I argued for frugality in the context of spending decisions. Apply that idea to investing, however, and watch out for the brickbats that will be sent sailing in your direction!

The reality is that wasting money in the investing area sets back your quest for financial freedom as much as does wasting money in the spending area. Buying stocks when they are overpriced is wasting money. Some don’t like to hear it, but it’s so, it’s so.

Stocks are not going to go out of style anytime soon. You don’t need to be in a rush to buy them. When a house that you want costs too much, it’s viewed as a smart idea to wait until the price comes down. When a car that you want costs too much, it’s viewed as a smart idea to wait until the price comes down. I advise doing the same when an investment class that you want costs too much. I love stocks as much as just about anyone else I know. But there are limits to what I will pay for them, just as there are limits to what I will pay for a vacation or a restaurant meal or a sweater.

I’ve known a lot of people who think of themselves as investing geniuses who don’t pay hardly any attention whatsoever to the price they are paying for the stocks they buy. Knowing this should give you a boost if you are someone who has shown skill in the saving area but feels intimidated by the idea of tackling the investing project. If you appreciate the value of thrift, you possess the single most important trait that a successful long-term investor needs to possess — an eye for the deal. Those dollars add up, both on the saving side and on the investing side.

Saving and investing go together like a horse and carriage because one leads naturally to the other.

Is it more important to save effectively or to invest effectively? It’s more important to save effectively. Why? Because that’s what gets the ball rolling. The aspiring early retiree who saves a good percentage of her income but who earns a small return on her investments is in far better shape than the aspiring early retiree who earns an enviable rate of return on a small pile of assets. If it’s a choice of getting your saving house in order or getting your investing house in order, choose to get your saving house in order. Effective saving will cover a multitude of investing sins.

It doesn’t work the other way around.

Or does it?

Effective Savers Become Effective Investors

To a small extent, it does. One trick that pays a big reward is to think of your earnings on your investments as an income stream that comes to you as a result of work done by your money rather than work done by you. This is an obvious point but one that is too often missed by those who find it a struggle to save. It is usually only when you become an effective investor that the magic of compounding hits home.
So there is a sense in which this is a chicken-and-egg riddle. You can’t invest until you save; so saving comes first. But it is seeing how being able to invest permits you to overcome dependence on a paycheck that often serves to motivate a successful saving effort. Thoughts of the payoff of effective investing often must come before effective saving.

There’s a sense in which effective investors don’t need to worry about saving as much as do those who do not know how to invest well; they are adding to their accumulated wealth through a different process. But effective investors usually care more about effective saving. Effective investors often come to view investing as a game they want to win. Adding new dollars to the pool of investable money is one way to gain an edge in the game. Learn saving first, but, when you have risen to a high level of competence as a saver, it makes sense to direct your efforts to raising your skills as an investor rather than to reviewing saving ideas you have mastered. Becoming a good investor will make you an even better saver.

Saving and investing go together like a horse and carriage because how well you manage the one influences how you feel about the other.

The big problem with saving is motivation. Most of us earn enough to save significant amounts of money. But most of us find considerable appeal in the exciting life enhancements available to us by spending in this Consumer Wonderland of ours.

The big problem with investing is confidence. It doesn’t take motivation to invest; you are forced to do it once you acquire assets, once you save. But most middle-class investors squander a high percentage of their investing dollars as a result of being taken in by one or another of the surface-plausible theories of how to invest that just do not stand up to serious scrutiny. It stuns and amazes me how little most of us know about the investing fundamentals. The other side of the story is that it excites me how much progress we could make in our quests for early financial freedom if we got our acts together.

There was a time when I had no more confidence in my investing abilities than most others and less than many others. Few would say that about me today. I have limitations and I like to believe that I am aware of them. On the issues that I have studied in depth (the valuations-related issues), however, I feel the confidence needed to take my place on any stage on Planet Earth and to argue my case before any group of “experts.” I know what I know, as the Paul Simon song asserted.

That confidence has its roots in my earlier efforts to come to terms with what it meant to be an effective saver. I spent lots of time mastering saving and the skills that I developed just naturally over time made me an effective investor. Not in a direct way. There are still lots of aspects of the investing project regarding which I have little knowledge. What my success in saving gave me was the confidence I needed to sort through the gibberish that often passes as investing “wisdom.” My success as a saver left me far less inclined to accept on faith nonsense that causes so many middle-class investors to fall into traps.

Investing is one of those fields in which it is not what you don’t know that hurts you so much as what you come to think you know for sure that just isn’t so. You don’t need to be smarter in an I.Q. sense to see through the cons being worked on you by 80 percent of the material published in the conventional media. What you need to do is to think clearly enough to ask hard questions and to be stubborn enough to insist on meaningful responses to those questions. That takes not I.Q. points, but confidence. Saving well can give you the confidence needed to figure out what is needed to invest well.

Saving and investing go together like a horse and carriage because one can take the place of the other.

Saving Books, Investing Books

The quickest route to early financial freedom is becoming both an effective saver and an effective investor. I think it is worth taking the time to becoming reasonably effective at both important life tasks. Some of us, however, are just never going to get the saving bug. And some of us will never feel comfortable with investing, no matter how much we save.

It is sometimes the thrill of investing that draws someone to master it; investing really is a game in many respects. The type of person who is drawn to the sport of investing might not be the type who is ever able to accept the “boredom” of saving. I don’t accept the idea that saving needs to be boring. It’s a reality that many see it that way, however.

Effective savers are often people who like having control over how their lives are going to turn out. If you admire this trait, as I do, you will describe them as people with independent spirits. If you are inclined to disparage it, you might refer to savers as control freaks. Either way, the thing that drives one to save — the desire to have and to hold the power to decide one’s own fate — can in some cases make it hard to turn over one’s life savings to an investment class that can at times experience price crashes. And all of the ones that provide the best long-term returns do that! Many effective savers will find it hard becoming effective investors, no matter how hard they try.

In those cases, effective saving can make up for ineffective investing and effective investing can make up for ineffective saving. It’s the harder and rockier and longer road to master only one of the two essential money management skills. But you can get from here to there with a mastery of only the one that you take to naturally, if you really must limit yourself to mastery of only one.

Saving and investing go together like a horse and carriage because they are two steps in a three-step process.

I like the idea of integrating the various money tasks. Neither saving nor investing takes place in isolation. They are related tasks, and seeing the connections can help you develop a holistic and healthy overall take on the money management project.

Money works its way through our lives via a three-step process. We get hungry. We work. That’s trading our time for money. That’s earning. Eventually, we put aside a portion of what we earn to allow us to buy stuff not today but tomorrow. That’s saving. Then we figure out that by becoming more sophisticated about this business of putting aside a portion of what we earn, we can overcome the need to work earlier in life. That’s investing.

Working effectively can take the place of investing effectively. Earning more often brings in greater benefits because most of us devote a large portion of our lives to the earning aspects of the life project. Saving can take the place of working. That’s the entire idea behind the Retire Early Movement. Most middle-class workers of today have the option of overcoming paycheck dependence long before they turn old; it’s done by saving more effectively than those content to work until they turn sixty-five. Investing too can take the place of working, of course. And saving can take the place of investing and investing can take the place of saving, as noted above.

I view working, saving and investing as spokes on a wheel that might be termed “The Life Fulfillment Wheel.” This is why I argue that there is no such thing as complete financial freedom. Financial freedom is everyone’s goal, but it is a goal that is never achieved; once you attain the state that you think of today as financial freedom, your vision will expand to take in elements of a bigger and better and bolder life, one that will cost more money and require a more expansive vision of financial freedom.

This is not a bad thing, it is an exciting thing. The suggestion is that there is always something new to live for and to strive for, no matter how high up the mountain you climb. You will never have done enough work. You will never have saved enough. You will never have learned all you need to know about how to invest.

Effective Money Management

Don’t feel bad if there are aspects of saving or investing that you just do not get at this time. Not getting something means that you have something ahead of you to get in the time remaining to you. Not getting something now gives you something to strive for tomorrow. We are meant to learn from and enjoy the journey, not the temporary destination points.

There’s no such thing as a finished saver or a finished investor. We’re all at different stages of a lifelong learning process.

Saving and investing go together like a horse and carriage because how you handle the one affects the risk involved in doing the other.

In my best year, I saved $88,000. There was a reason why I was saving like a madperson at that stage of my life. I was desperate to get out of my corporate job (the one plus was that they paid me a madperson’s salary) and into work that meant something. Stocks were selling at extremely high valuations that year, at price levels that have rarely been reached in the history of these United States. How much of that $88,000 do you think I put into stocks at those price levels?

Those who know Farmer Hocus well can shout out the answer — a Big Fat Zero! I invested a Big Fat Zero in stocks at that time because I was desperate to get the accumulated wealth number up fast and stocks did not look like a good bet to be helping me to do it.

Say that I had saved only $8,800 that year. Would I have been inclined to put something into stocks? Perhaps. I don’t think it’s a bad idea to invest 30 percent of one’s savings in stocks, even at times of extremely high prices. I don’t see that any great harm would have been done by me having put $3,000 into stocks in that year.

Much of the conventional money advice suggests that saving and investing decisions are entirely separate. It’s not so. Both saving and investing are activities you engage in to enhance your enjoyment of life. If enhancing your enjoyment of life means getting the accumulated wealth number up quickly in the saving area, enhancing your enjoyment of life means getting your accumulated wealth number up quickly in the investing area too. How much you save affects how much risk you can take in your investing strategies and how much risk you take in your investing strategies affects how much you need to save.

Say that there’s a company that you have researched that you would like to invest in. But say also that this investment is a risky one and that you cannot afford to take on too much risk in your investing plan. You could turn to your budget and identify another $40 of monthly cuts in spending. The Multiply-by-25 Rule (see the article on “How to Start Saving” at the “Upsizing” section of the site) tells you that that move reduces the amount you need to save to attain financial freedom by $12,000. It could be argued that that move “permits” you to take on $12,000 worth of risky investing that you couldn’t afford before. If the investment pays off, you’ll be that much more ahead!

Saving and investing go together like a horse and carriage because how you handle one affects the return obtained from doing the other.

Money Management Made Simple

Stocks are down. Way down. Prices have dropped 50 percent. You’re tempted to sell. You know that buy-and-hold is what works. But you cannot stand to see your retirement stash grow smaller month by month by month.

You could save more. That could be what you need to stabilize the ship. If saving more permits you to stick to a buy-and-hold strategy (and if buy-and-hold actually makes sense for someone with your stock allocation), that extra saving will in time almost surely come to enhance your investment return.
It works the other way around too. Investing more effectively increases your motivation to save because each dollar saved counts for more in the hands of an effective investor. I have been thinking recently that we need to change The Multiply-by-25 Rule to the Multiply-by-20 Rule. In earlier days, I was not sure that Passion Savers could count on earning a real annual return of five percent in all market environments. So I used The Multiply-by-25 Rule, which demands only a 4 percent annual return. With the development of the Valuation-Informed Indexing approach, I have become increasingly confident that a 5 percent annual return can be assured regardless of where valuations stand. I think it is perfectly realistic for those who have a handle on the investing ideas discussed at our boards in recent years to employ a Multiply-by-20 Rule when constructing their financial freedom plans. How you invest influences the efficacy of your saving strategies.

Saving and investing go together like a horse and carriage because the attitude taken towards one affects the attitude taken towards the other.

It’s not hard to save and it’s not hard to invest.

It’s unsettling to think about either.

We all have made mistakes in our money lives. Putting together a plan requires us to face those mistakes. That makes us anxious. Many of us put off saving and investing as a means of avoiding the anxiety that pursuing those life projects causes us.

Get started somewhere. That’s the key.

Get started somewhere and you will develop the good feelings it takes to get you to the next stage of the process.

The hardest part of learning how to run a marathon is learning how to run three miles. That part is ugly. But after that, it’s all downhill.

Saving and investing go together like a horse and carriage because seeking early financial freedom is the key to doing both well.

Money Management Made Simple

Pursuing early financial freedom changes everything.

If you’re saving because you think you should, you’re going to do a slapdash job of it. If you’re looking into investments because you have some money sitting around and you know it doesn’t make sense to leave it in a money market account, you’re going to do a slapdash job of it.

Those seeking early financial freedom are saving and investing to make their lives what they always wanted them to be. Make early financial freedom the engine of your plan, and you won’t find the idea of putting together a budget a giant bore. Make early financial freedom the engine of your plan, and you won’t get so caught up in the dark emotions as to talk yourself into believing that there really might be something to that Efficient Market Theory business.

It’s not what you know that counts. It’s what you feel that counts. Knowing matters. But feeling comes first. Get the feelings right, and the rest will fall into place. Only a customized saving goal can generate the sort of power that will put you in the ranks of the world’s best savers and investors.

Passionate savers really do save. Passionate investors don’t fall for the tricks that do in so many others somewhere down the line.


The Purpose of Money — Thinking Through the Basics

Question #1 about the Purpose of Money — Why Save?

Purpose of Money

The usual answer is “to finance your old-age retirement.” That’s not a good answer.

If your old-age retirement is more than five years off, that saving goal is probably not going to generate much saving behavior. It’s too distant a goal. It’s not a goal that is of intense personal concern to hardly any of us. It doesn’t work.

The true purpose of saving is to attain financial freedom. One purpose to which financial freedom can be put is to finance an old-age retirement. But it of course can be put to many other purposes too. Using one of those other purposes as your primary saving goal will make your saving effort more effective.

Question #2 about the Purpose of Money — Why Spend?

To enhance your enjoyment of life.

The conventional error is to think that spending and saving serve fundamentally different purposes. Both spending and saving enhance the enjoyment of life. Spending does this by providing you access to goods and services. Saving does this by providing you access to plentiful free time and soul-satisfying work.

Spending is a good choice when it does the better job of enhancing your enjoyment of life. Spending is a poor choice when it does the worse job of enhancing your enjoyment of life.

Question #3 about the Purpose of Money — Why Work?

To earn the money needed to keep body and soul joined.

That’s one reason to work. It is not the only one. Middle-class workers also work for the sense of fulfillment it brings.

Work is in part a payment (we give up our time in exchange for dollars we need to buy food and shelter) and in part a reward (we face challenges and make friends and experience growth and make the world a better place).

Question #4 about the Purpose of Money — What is Success?

Success is gaining a greater ability to choose enjoyable work.

What Is Money For? The less your decisions as to what work to do are influenced by your need for money, the more free you are to choose your work and thereby leave the mark of your personality on the world.

Question #5 about the Purpose of Money — What is Wealth?

It varies from person to person.

For some, wealth is having many things.

For some, wealth is doing enjoyable work.

For some, wealth is growing as a person.

For some, wealth is having time to rest and think.

For most, wealth is a mix of these things.

Question #6 about the Purpose of Money — What needs to change?

Purpose questions are fundamental. Consideration of these questions should be the foundation for all money management advice. It is not possible to give good money management advice without addressing purpose-of-money questions.

Question #7 about the Purpose of Money — Is it changing?

Yes, slowly.

There are more poor money decisions made today than at any earlier time in history. That’s largely because there is more money being made by more people today.

Meaning of Money There are also many fine money decisions being made today. The same middle-class workers who bemoan their inability to save have built fine lives for themselves and their loved ones. These people have what it takes to save effectively. What they lack is an understanding of how to go about it in a systematic way.

Question #8 about the Purpose of Money — What happens next?

The failure of the old money management rules becomes increasingly obvious. We continue to earn more and find that doing so continues to satisfy us less. In frustration with the failed model, we open up to the ideas of those who have rooted their money management ideas in a clearer understanding of the purpose of money.

The old model does not work because the old model gets the fundamentals wrong. Understanding the purpose of money is the starting point to offering good money management advice and to making good money management decisions.

Question #9 about the Purpose of Money — Shouldn’t it be simple to understand the purpose of money?

It seems as if if should be a simple thing. What has complicated it is that the purpose of money has changed over the years.

For most of humankind’s history, the purpose of money was to keep body and soul joined. Saving meant putting something aside for a rainy day. Middle-class workers did not aspire to financially secure retirements.

Money and Life

When our work became sufficiently productive to permit retirement, that naturally became the focus of our saving efforts. We have become even more productive in the years since. Today, we are capable of pursuing more exciting saving goals. Changed economic circumstances permit a changed understanding of the purpose of money.

Question #10 about the Purpose of Money — How is the new understanding of the purpose of money different?

It is more expansive. We still use money to obtain food and shelter. We also use it to finance hundreds of projects of more compelling personal interest. The trick to becoming an effective saver is coming to appreciate that saving as well as spending can be employed to advance the new purpose of money.


New Money Ideas from the Financial Freedom Community

This article briefly describes the most important of the new money ideas developed during the first six years of discussions held at the various Financial Freedom Community discussion boards.

The first of our new money ideas is our showing that it should be the rule rather than the exception to win financial freedom early in life.

New Money Ideas

Most money advice argues that it is hard to save 10 percent of income and that it is hard to save enough to provide for a retirement beginning at age 65. Our community is full of middle-class workers who save far higher percentages of their income and who retire at far earlier ages.

It clearly is so that not many following the conventional money management advice are able to retire early. But it also clearly is so that the opportunity is there for many, if they are willing to learn the secrets from those who have traveled the path to early financial freedom before them.

It would be overstating things to say that we have shown that it is easy to win financial freedom early in life. But we have shown that lots and lots of normal everyday people have done it. I see no good reason why lots of others should not be giving it a try.

The second of our new money ideas is our showing that interest in winning financial freedom early in life is broad and deep.

There are today only a limited number of web sites and books that offer advice on how to retire early or on how to win financial freedom early in life. But our board experience shows that this topic is not a niche topic. It appears that there are hundreds of thousands of middle-class workers interested in our topic. It could be that we will find in time that the number is really in the millions.

The Motley Fool board was during its Golden Age the most successful board in the history of that site. And the Early Retirement forum attracts new posters on a daily basis. The Retire Early topic is a topic that a lot of people want to know more about.

I believe that a lot of people who visit our boards don’t have a strong interest in the particular goal of retiring early. I think that many people see that the best source to go to for new money ideas is people who have tried out new strategies and have had success with them. What group of people is better qualified to offer money management insights than the group that has figured out how to save so effectively that they are able to leave their jobs in their 50s or 40s?

The Financial Freedom Community doesn’t just discuss new money ideas. We put them into practice. We test them and see that they work before we offer them for the consideration of the Big Bad World outside the friendly confines of our ten discussion boards.

The third of our new money ideas is our showing that those who save effectively are not misers.

Solving Money Problems Reduces Stress Rarely do we hear a story on our boards of an effective saver who feels that he or she had to experience significant deprivation to attain his or her financial freedom goals. The idea that significant deprivation is a necessary part of the saving experience is a myth.

I have gone so far as to argue that it is often easier to save 20 percent of income than it is to save 10 percent, and that in some circumstances it is even easier to save 30 percent.

How so?

When you save only 10 percent of income, the progress you make on your financial freedom quest is so slow that the saving experience can be a painfully prolonged one. When you save more, you begin to see benefits soon enough to be able to enjoy each step of the saving process.

The fourth of our new money ideas is our showing that a willingness to engage in planning is the distinguishing mark of the effective saver.

I don’t see much evidence in our Post Archives that it is necessary to experience deprivation to gain financial freedom early in life. I do see a good bit of evidence that good things happen to those who plan for them.

Community members offer a variety of perspectives on all sorts of Retire Early topics. But just about all of us are planners. That is the glue that holds our movement together. Financial freedom doesn’t just happen. It happens to those who plan for it.

There are some who argue that planning is so important to the financial freedom quest that it is only personality types drawn to planning who can succeed in the Retire Early quest. I question this. I believe that we will find that different personality types bring different strong and weak points to the financial freedom project and that those who are not naturally drawn to planning can make up for this negative with positives that those who naturally enjoy planning often lack.

I do agree, however, that early financial freedom is available only to those who possess at least a willingness to engage in a good bit of planning.

The fifth of our new money ideas is our showing that early retirement is not just a Yuppie fad.

Expand Your Mind with New Money Ideas

I have read a number of articles arguing that the increased interest we have seen in early retirement in recent years is the result of a faddish interest in the subject on the part of Yuppies, perhaps the result of the bull market of the 80s and 90s. Our Post Archives do not support this claim, in my assessment.

There have been a number of people who have posted to our boards who cannot fairly be described as Yuppies. We have not had as many moderate-income workers join in on the discussions as I would like to see join in on the discussions, but we have seen a good number of them all the same. And we have seen all sorts of views expressed on stocks. Some of us are madly in love with stocks, some of us are a little bit in love with stocks and a little bit in love with other investment classes, and some of us are not in love with stocks at all.

The Financial Freedom Community is too diverse a group for the intense interest we have seen in the subject of how to put together a successful early retirement plan to be the result of a faddish pursuit.

The sixth of our new money ideas is our showing that the conventional methodology for calculating safe withdrawal rates is analytically invalid.

There are an increasing number of investing experts today speaking out against the absurdly inflated safe withdrawal rate claims of an earlier day. That’s a good thing. We need to see word get out on this one before millions suffer serious losses in portfolio value as a result of the analytical flaws of the conventional methodology studies.

The discovery of the flaws of the conventional studies is not a new one for the Financial Freedom Community. We have been studying this question in depth for close to four years now. We were first with this one.

That is why we have been able to take the insights we developed from learning what the historical stock-return data really says about how to invest for the long-term to places that no other investing analysts have yet taken them. Enter the phrases “Valuation-Informed Indexing” or “The New Buy-and-Hold” into a search engine and most of the results generated will be to web sites or discussion boards that are a part of the Financial Freedom Community.

The seventh of our new money ideas is our showing that there is a widespread concern among middle-class workers over changes taking place in the rules that govern how the modern-day workplace is run.

There are lots of different viewpoints expressed in our community re this one. But most seem to agree that it is an important issue.

The Lightbulb Turns On With New Money Ideas

Some conventional money advisors might not even categorize concerns over the rules that govern the modern-day workplace to be money management concerns. But these are money management concerns. Many Financial Freedom Community members became motivated to save effectively because of concerns they experienced over the direction in which their work lives were headed. One of our most important new money ideas is that it is only possible to make sense out of a good number of money management questions when those questions are examined in connection with work questions and when the connections between these two types of questions are given consideration.

The eighth of our new money ideas is our showing that a desire to avoid deferred gratification is not the primary problem holding back most middle-class workers from saving effectively.

Financial Freedom Community members experience deferral of gratification. It generally takes a good number of years to bring a Retire Early plan to fruition. But how often do you hear fellow community members complain of how long it takes to get from where they are to where they want to be?

The reality is that it is not just early retirement that is fun. Questing for early retirement is fun too. Putting together a financial freedom plan is fun. Effective saving does not require cutting back on one’s desire to have fun.

The ninth of our new money ideas is our showing that the biggest problems in seeking early financial freedom are problems outside the control of the worker seeking it.

One of our biggest fears is that Social Security will not be there for us. Another is that the expense of health insurance will continue to skyrocket.

There is good cause for these concerns. These are matters that must be considered in putting together a long-term financial plan and these are matters that are to a large extent outside the control of the individual putting together a plan.

The tenth of our new money ideas is our showing that the quest for financial freedom is as much a Life Planning Project as it is a Financial Planning Project.

Unconventional Money IdeasIn our early days,. we talked mostly about safe withdrawal rates and substantially equal periodic payments. It was all about SWRs and SEPPs — Weren’t those the days, my friend?

In the years since we have discussed having children, getting married, where to live, what sort of house to buy, divorce, religion, life purpose, what to tell the neighbors, what to tell the boss, and on and on and on. Our boards are Financial Planning boards. But at times they seem to be Life Planning boards.

Or are those just two different phrases used to refer to what is pretty much the same thing?

20 Dangerous Money Myths — They Think We’re Stupid!

#1 of 20 Dangerous Money Myths — It’s Always a Good Idea to Hold a Mortgage

Money Myths

Mortgages serve a good purpose. They allow you to own a home faster than you could if you had to come up with the money on your own before you could move in. But the mortgage concept has been oversold. I often hear people say that it’s always a good idea to hold a mortgage, even if you are able to pay off the mortgage and own the house in full.

One argument that is often put forward is that, if you have the funds needed to pay off your mortgage, you are better off investing it in stocks than doing away with the interest payment you make on your loan. This does not make sense, at least not as a general proposition. Why would a bank lend you money for less than what it can earn in stocks?

Banks write mortgages to make money. They charge an interest rate high enough to earn a profit after paying all their expenses. You are incurring a cost when you take on a mortgage. It’s often a cost that is worth taking on because of the benefits of having a mortgage. But it is a mistake to think that a mortgage is cost-free or that there is not a benefit associated with paying off a mortgage.

There are exceptions to the usual rule. There have been times when banks have written mortgages calling for low rates of interest and regretted making those loans. In such cases, there really is a good case that can be made for holding onto the mortgage even after you have the funds to pay it off. But such cases are exceptions to the usual rule.

#2 or 20 Dangerous Money Myths — Stocks Are Always Best for the Long Run

There is no one asset class that is always best for the long run. There never will be one. There never can be one.

Why? Because the long-term appeal of an investment always depends on how popular it has become. The less popular an asset class, the more likely it is to provide an enticing long-term return. If there ever were an asset class that became widely thought to always be best for the long run, that asset class would soon become so overpriced that the reason why many purchased it would no longer apply.

The book Stocks for the Long Run was published in 1994, when the P/E10 level was 21 and the most likely 10-year annualized real return for stocks was 2.6 percent (see “Return Predictor” tab). Six years later, the P/E10 value was 44 and the most likely 10-year annualized real return for stocks was a negative 1 percent. The book capitalized on the popularity of an idea that had driven long-term stock returns down to very low levels even before it was published, and its own popularity drove long-term returns down far lower still. Stocks really are best for the long run only when most investors do not view them as being such.

#3 of 20 Dangerous Money Myths — Everyone Should Aim to Save 10 Percent of Income.

Money Illusions

Everyone should attend three baseball games per year, wear yellow twice per week, and eat twice as many Mounds with Almonds bars as they do plain old Mounds bars.

These ideas make no sense. Neither does the idea that we all should aim to save 10 percent. We are individuals. We all pursue different life goals making the best of different financial circumstances. Some of us should be saving zero or even going into debt for a time (so that we can attend school, for example). Others of us should be saving 80 percent of post-tax income, as I did for a time when I was trying to speed up the financing of the career shift that now permits me to spend the hours of my day writing articles like this one.

There is no one saving percentage that makes sense for all of us. This pernicious idea is largely responsible for the common perception of saving as a chore and a duty and a bother. It is only when you compare the life enhancement that can be obtained from saving with the life enhancement that can be obtained from spending that you come to appreciate how exciting a money allocation option saving can be.

#4 of 20 Dangerous Money Myths — To Retire, You Need an Income Stream of 80 Percent of Your Pre-Retirement Income

It might be reasonable to believe that to retire, you need an income stream of 80 percent of your pre-retirement spending (the thinking here would be that you will be able to avoid job-related expenses in retirement). There is no necessary connection between pre-retirement income and post-retirement spending.

Again, this money myth is dangerous because it causes people to develop bad habits of thinking about money management. The more you save, the less of your pre-retirement income you need to replace in retirement. The idea that it is pre-retirement income that you need to replace seems to be based on a thought that most of us save insignificant amounts of our income. When you start buying into those sorts of assumptions, the financing of a retirement becomes difficult indeed.

#5 of 20 Dangerous Money Myths — It’s Difficult to Finance an Age-65 Retirement Today

Why would this be so? Our parents and grandparents planned age-65 retirements. Most of today’s workers earn a good bit more than they did. So why is it so hard for us to achieve the financial goals that those who came before us were able to achieve?

It’s because we have bought into the idea that financing an old-age retirement is all but undoable. The reality is that most of us earn enough to be giving serious consideration to retiring long before we turn 65. If we aimed for big goals, we would achieve them. But most do not even view an early retirement as a remote possibility. It is highly unlikely that you will achieve goals that you do not pursue.

#6 of 20 Dangerous Money Myths — Non-Cable Television Is Free

How do they pay the actors and the directors and the stockholders of the broadcasting companies? Watching “free” television costs you money. If it didn’t, they wouldn’t be providing it to you for “free.”

Saving Myths

But you don’t ever buy things because of the commercials you have seen urging you to do so, right? The unsettling reality is that just about everyone else says that they do not do so either.

#7 of 20 Dangerous Money Myths — You Show Your Love for Someone By Buying Them Gifts

A good number of people receive so many gifts during the Christmas holidays that they feel a slight annoyance at the task of having to open them all. They of course do not want to hurt the feelings of the people who were kind enough to buy something for them. But most of us don’t need more stuff and it is a pain to receive more things we do not need, things that will go to waste or fill up the yard-sale table a few months down the line. We’ve gone berserko re this one.

Give your loved ones your time. That’s the thing that you could give that would really be “just perfect.”

To give time, you need to have some to give. That requires that you be freed of paycheck dependence. That requires that you not spend so much on gifts. Do you see how it all connects and how it is you and your loved ones who are coming out on the losing end by your too easy acceptance of an idea that has been promoted by people trying to get us to buy stuff?

#8 of 20 Dangerous Money Myths — Putting Money Into a Section 401(k) Plan Is Always a Good Idea

It usually is a good idea to put money into a Section 401(k) plan. When there is an employer match for contributions made, the deal is too good to pass up.

It’s a mistake, however, to believe that there is no loss associated with agreeing to have your money removed from your control for decades. $10,000 that you can spend today is worth more than $10,000 that you can spend 20 years from now. When you give up control of your money for a significant length of time, you give up something of significance.

Investing Myths

#9 of 20 Dangerous Money Myths — We Need Houses of Twice the Size of Those We Grew Up In

I have seen some beautiful big houses. I understand the appeal.

There’s a cost.

Most of today’s families are smaller and most of today’s houses are bigger. This does not make sense.

A big house costs more to furnish and to clean and to paint or wallpaper. A big house gives you a place to store lots of stuff. That makes it easier to justify buying lots of stuff.

There are a lot of people who would be financially free today but who are not because the idea entered their head to buy a big house.

#10 of 20 Dangerous Money Myths — No One Has a Right to Stop Working Before They Turn 65

Why is that? If two people earn the same income and one elects to save a large percentage of it so that he can retire early and the other elects instead to buy lots of stuff, can we really say that the second person is morally superior to the first?

We have choices available to us that those who came before us did not possess. I believe that we need to exercise care in electing what choices to pursue. But I do not buy the idea that it is morally preferable to spend wastefully and to work until old age than to spend carefully and retire early. Early retirement is an achievement that should be applauded.

#11 of 20 Dangerous Money Myths — “Retirement” Means Never Again Doing Anything Productive

This dangerous money myth is the mirror version of the one described immediately above it. While some tell us that we are wrong to want to retire early, others insist that we adhere to their particular vision of “retirement” or forget the idea altogether. Yuck!

As it becomes more popular for people to retire in their 40s and 50s, people naturally are going to recraft the retirement concept to serve the needs of those who overcome paycheck dependence (either in whole or in part) at a time of life at which they still have lots of ambition and energy remaining to them. Make your retirement mean what you want it to mean. Retire only from those aspects of the daily grind that lack appeal for you.

Money Management MythsYou have my blessing to work harder in your “retirement” than you ever did in your years of corporate employment. That’s what I do.

#12 of 20 Dangerous Money Myths — Kids are Always Expensive

Some spend a lot of money on their kids. Some do not. As is so re so many money topics, it is the choices we make that determine how much we spend.

It would be a terrible mistake to think that kids come without financial consequences. It is also a mistake to think that there is only one way to have kids, the expensive way. If you want kids and are concerned about the cost, I urge you not to buy into this dangerous money myth without first running some numbers and thereby learning some customized realities.

#13 of 20 Dangerous Money Myths — Going to School Is Always Worth the Cost Incurred

Not anymore it’s not.

There was a day when having a college education gave you a big edge in the employment market. That day is gone. The cost of an education is greater than it was in the past and the payoff is less. Even the more affordable degrees from top online schools can be risky. Whether the potential justifies the cost depends on the circumstances.

#14 of 20 Dangerous Money Myths — Corporate Employment Is the Safest Bet

Corporate employment is a risky bet today. Job security is less than what it once was. And the loss associated with toeing the company line and not developing your skills to the extent you might have developed them in more entrepreneurial pursuits is greater.

There are many circumstances in which corporate employment is still the most sensible move. It’s no longer always the safest bet, however.

#15 of 20 Dangerous Money Myths — Eating Out Is a Convenience Almost Always Worth the Cost

Is it? How much traffic do you have to endure getting there? How easy is it to find a parking place? How long do you have to sit at your table before you are served? How often do you have to send something back? How many times do you regret overeating after eating out? Is the bloated feeling brought on by the huge portions served not an inconvenience?

#16 of 20 Dangerous Money Myths — It’s Not Possible for Those Going Through Hard Times to Save

I once was quoted as saying that just about anyone can save something. That comment generated a good number of hostile e-mails from people who are earning modest incomes or who are in difficult circumstances (they have illnesses or are single parents). I of course sympathize with the people who sent the e-mails.

Myths About Money I still believe that it is possible for just about everyone to save something. If you rationalize not saving anything when you are in one set of circumstances, you will later find yourself rationalizing not saving anything when you are in all sorts of other circumstances. We all think we have it hard. Some really do have it hard and some really do not. But we all rationalize about these sorts of things. So we need to be careful about supplying ourselves justifications not to save.

Say that you are in circumstances that make it hard to save but that you manage to save something nevertheless. The dollars might not end up meaning all that much. You know what will end up meaning a lot? The feeling of empowerment you experience by having taken action to improve your circumstances. The tougher your circumstances, the more you need to experience that feeling.

You should not deny yourself at least a small portion of the good feeling that can be had only by saving money unless your circumstances are truly exceptionally difficult. I don’t encourage people in tough spots to save something because I am lacking in sympathy. I encourage it because saving is something that really can turn things around.

#17 of 20 Dangerous Money Myths — Budgets Are Boring

Everyone likes to talk about themselves. So why is it that so many view a budget — which is a document focused on their personal priorities and plans — as “boring”? It’s because of our wrongheaded view of what saving is all about.

Stop thinking of a budget as a document that says “No!” to what you want to do with your life and budgets stop being boring. A budget is a friend that helps you and guides you and instructs you as to how to achieve your most important Life Goals. A budget is a document that teaches you how to get a “Yes!” to questions for which those without budgets always hear a “No!”

#18 of 20 Dangerous Money Myths — No One Can Pick Stocks Effectively

I am a proponent of indexing for those who do not have the time available to learn how to pick stocks effectively. It takes lots of time and those who are not willing to put in the time are better off buying index funds.

However, I see it as a big mistake to give up entirely on the idea that you can pick stocks effectively. Perhaps today you cannot do so. Life is for learning. Invest in index funds for now but remain open to the idea of picking stocks as your knowledge of what is required grows.

Career Change Myths
I believe that the idea that it is impossible to pick stocks has been advanced in part to make those who index feel better about their decision to pass on the gains available by doing so. It’s not the job of investing experts to make us feel good about doing things that hurt us. It’s fine for experts to assure us that it is not necessary to pick individual stocks effectively to earn a good return. But they should also encourage us to learn what we can about how to pick stocks as opportunities present themselves. In the long run, picking up this skill can become a big plus and many of us can indeed pick it up in time.

#19 of 20 Dangerous Money Myths — It Is Skill with Numbers That Makes a Money Expert

That’s not been my experience. I am a Numbers Dunce. That holds me back in some areas. My strong sense is that it helps me more than it holds me back. I believe that one of the reasons why I was able to identify the flaws in the Old School safe withdrawal rate studies is that I was not impressed by the mathematical gymnastics being evidenced in these studies. When you cannot work numbers well, you tend to rely on your common sense to figure things out. The Old School studies offer impressive numbers manipulations but are lacking in the common sense department.

The more I study the topic of financial freedom, the more I find this to be so. Numbers are important. Money topics are often discussed using the language of numbers. But the drivers of most money decisions are emotional in nature. We need more experts who focus on the emotional side of both saving and investing topics.

#20 of 20 Dangerous Money Myths — Discussion Boards Are a Waste of Time

Internet discussion boards get no respect. One of the reasons why the Campaign of Terror has been such a problem for us is that site owners do not take their promises to protect us from abusive posters seriously. My sense is that discussion boards are loss leaders at many money sites, and the site owners are not willing to commit the resources needed to see that the published rules are enforced in reasonable ways.

Boo, baby!

Investing Illusions

The internet discussion board is a powerful communications medium of the future, especially in the money area. Discussion boards permit us to find out how real live human beings are implementing the advice they pick up from reading books and articles and web sites. And discussion boards permit for follow-up questioning about points that are not clear. In the investing area especially, we have learned that a good bit of the conventional wisdom does not stand up to serious questioning. The same is true to a lesser extent in the saving area as well.

Money decisions are made by humans, not machines. Discussion boards are the perfect medium for learning about how humans put money ideas to work in the real world.

New Money Management Advice — What’s Here That’s Not Elsewhere

This article offers brief descriptions of money management advice offered at this site that is generally not offered elsewhere. Please use the Site Search tool at the bottom of the page to locate articles that offer more detailed discussions of these 20 insights.

New Money Management Advice — Insight #1: Paying yourself first is not always a good idea.

The “Pay Yourself First” strategy does produce results for many who employ it. But the “Pay Yourself First” approach to saving is a “Just Do It!” approach to saving. Force yourself to save and you will never come to love saving with the intensity of most Passion Savers. The more effective approach in the long-term is to pay yourself last, after comparing the value propositions offered by spending and saving and electing to save only in those circumstances in which saving offers you a better opportunity to achieve your most important life goals.

New Money Management Advice

New Money Management Advice — Insight #2: You cannot achieve the full benefits of budgeting by writing a single budget.

The benefits of budgeting come from the enhanced understanding it provides of the trade-offs involved in electing to spend or save. After living with a budget for six months or so, you will be ready to craft a revised budget, one calling for better-informed trade-offs. Each new budget will permit you to obtain greater value from the dollars you earn.

New Money Management Advice — Insight #3: The purpose of your money management project is to accumulate an amount of wealth that is 25 times greater than the amount of annual spending you need to live your version of The Good Life.

The “Multiply-by-25 Rule” assumes that you can earn an average real return of 4 percent on your investments. The rule can be applied to individual budget categories, permitting you to calculate how much you need to save to have a fund large enough to cover a lifetime of spending on magazine subscriptions, or electricity, or car repairs.

New Money Management Advice — Insight #4: The compounding returns phenomenon applies not just to saving, but to spending as well.

A young person generally obtains a greater benefit from spending on education or physical fitness or travel than does an older person. This is an important reason why young people find it hard to save. The benefits of saving are greater for the young. But so is the cost associated with cutting back on spending.

New Money Management Advice — Insight #5: The world’s most effective savers generally are motivated by some goal other than the desire to finance an old-age retirement.

Human beings respond better to goals that can be realized within five years than they do to goals that cannot be realized for two or three or even four decades. Break your quest for financial freedom into parts, and focus your energies on a goal that can be achieved within a short amount of time, and you will feel more enthusiasm for the saving project.

Money Advice

New Money Management Advice — Insight #6: Planning is the key to winning financial freedom early in life.

Our Retire Early boards are comprised of young savers and middle-aged savers. We have white-collar workers and blue-collar workers. There are men who seek financial freedom early in life and there are women who seek financial freedom early in life. Some successful savers have large incomes, and some have modest incomes. The common denominator is that successful savers plan their financial affairs. The benefits of planning cannot be overstated.

New Money Management Advice — Insight #7: The old rules of money management don’t make sense anymore.

The conventional advice was developed for a time when middle-class workers earned less and when job security was greater. The exciting but dangerous New Economy requires a new approach to most money management questions.

New Money Management Advice — Insight #8: Workers often become more dependent on their paychecks as their pay increases.

The reason is that they use each pay increase as justification to spend more. Workers trying to maximize the life enhancement they obtain from each dollar they earn often save large percentages of their pay increases.

New Money Management Advice — Insight #9: It is often easier to save 20 percent of income than it is to save 10 percent of income.

Why? Because saving 20 percent allows the saver to make quicker progress on realization of her financial freedom goals. Each step forward adds to her enthusiasm for the saving project. Those saving 10 percent do not see tangible rewards for saving for a long time.

New Money Management Advice — Insight #10: Our concept of “retirement” needs to be reconstructed.

Most middle-class workers enjoy the sense of fulfillment they obtain from doing productive work. Rather than leave the world of work altogether at an early age, many would prefer to save enough to be able to continue to enjoy a middle-class lifestyle while doing work that pays less than their current employment but which provides a greater sense of personal satisfaction.

New Money Management Advice — Insight #11: Effective saving provides many benefits aside from the financing of an old-age retirement.

Unique Money Management Advice

Effective savers sleep easier at night, not worrying about economic recessions or corporate restructurings. They have more options available to them. For example, the can leave the world of work for a time to stay at home with their children when they are young or start their own businesses without needing to worry about bringing in a big income in the early years. They feel more confidence when negotiating with their employers over pay raises and conditions of employment.

New Money Management Advice — Insight #12: A desire for job change is a regular feature of middle-class life.

There is no such thing as a perfect job. The reason is that middle-class workers are always seeking new challenges. Once mastered, a job that was once perfect is no longer perfect.

New Money Management Advice — Insight #13: Many effective savers owe their success to a bad employment experience suffered early in life.

Most of us earn enough to win our financial freedom early in life. What we lack is the motivation needed to do the planning it takes to pull it off.

New Money Management Advice — Insight #14: Paying off the mortgage is often a good idea.

Once you pay off the mortgage, you will likely so enjoy the feeling of financial freedom that follows from doing so that the thought of taking on a large amount of debt will become distasteful. Paying off the mortgage changes how you think about money and about the freedom obtained through saving.

Unique Money Management Advice

New Money Management Advice — Insight #15: The discussions that effective savers have with their spouses when putting together their plans lead to a greater level of intimacy.

Learn what your spouse wants to spend money on and save money for, and you will likely learn things about her (or him) that you did not know before. Work with your spouse to achieve an important financial freedom goal, and your love for her (or him) will deepen.

New Money Management Advice — Insight #16: The value proposition of stocks changes dramatically from times of low valuation to times of high valuation.

Whatever your stock allocation is at times of moderate valuation, it should be something less than that at times of high valuation. If you fail to adjust your stock allocation to reflect changes in valuation, you are taking on more risk that what you thought was acceptable at the time you decided on your stock allocation percentage.

New Money Management Advice — Insight #17: Stock prices are highly predictable in the long term.

It is possible to identify a range of likely stock returns that you will obtain a range of likely stock returns that you will obtain in 10 years, 20 years, or 30 years from investing in an index fund. It is also possible to assign rough probabilities to various points on the spectrum of possibilities.

Clouds Money Management Ideas

New Money Management Advice — Insight #18: Today’s retirement planning tools are terribly flawed.

Millions of retirements have been put at risk because of grave flaws in conventional-methodology studies of safe withdrawal rates.

New Money Management Advice — Insight #19: Valuations likely will not rise as high in future bull markets as they have in past ones. Similarly, future bear markets may not bring prices as low as they have before.

New analytical tools that permit us to predict future stock returns are making stock investing an increasingly rational (and less emotional) endeavor.

New Money Management Advice — Insight #20: As of today, stock investing is primarily an emotional endeavor.

A good number of the statistical studies published during the recent bull market can more fairly be characterized as exercises in rationalization than as exercises in objective research. Even top-name researchers and top-name investing analysts are influenced by the emotions that drive bull markets (and bear markets too, of course).

10 Rarely Voiced Realities of Investing Today

Reality #1 of Investing Today — We are Poorly Informed About the Basics.

Investing Puzzles

Discussion boards permit us to learn things about investing that we couldn’t learn from books or speeches. One thing I’ve learned is that most middle-class investors of today do not possess a sure understanding of the basics –where stock returns come from, what causes prices to change, the distinction between the forms of timing that work and the forms that do not work, that sort of thing. I’ve become a big believer in stressing the basics over and over and over again.

Reality #2 of Investing Today — The “Experts” are Only Slightly Better Informed Than We Are.

We middle-class investors have an excuse; we’re busy and learning about investing is not our favorite thing to do with our time. The bigger problem is that the big-name experts are not all that much better informed than we are re the basics. They have mastered lots of advanced stuff. But not the fundamentals. Yowsa!

Reality #3 of Investing Today — We Have Placed Too Much Trust in the “Experts.”

The typical middle-class investor assumes that the “experts” are far better informed than he is. He doesn’t know enough about the realities himself to see the flaws in the conventional advice. And he doesn’t realize how great the pressures are on the experts to tell investors what they want to hear rather than what they need to hear. Most “experts” would be better characterized as expert salesmen or expert politicians than as expert investors, but few middle-class investors are cynical enough to appreciate the extent to which this is so.

Reality #4 of Investing Today — Complacency Has Become a Dangerous Habit of Thought.

Most of us are not too concerned about the flaws in the conventional investing wisdom. The huge bull market lasted long enough to make complacency a habit of thought.

Reality #5 of Investing Today — Our Complacency Is Coming Under Increasingly Strong Challenge.

Investing Trends

Our complacency has been challenged by eight years of poor performance for stocks. But most of us presume that the years of poor performance are setting the stage for a new bull run rather than that they are the early years of an inevitable return to reasonable price levels. We are only recently beginning to form strong doubts over what we were told during the huge bull market as to how stock investing works in the long run.

Reality #6 of Investing Today — There Are Big Price Drops to Come.

The fair-value P/E10 level is 14. We are now (this article was posted in January 2008) at a P/E10 level of 24. Given the lack of understanding of the fundamentals, the trip down to fair-value price levels is likely to cause widespread investor disillusionment, which may mean a drop to price levels far below the levels that represent fair value. Investor emotion brings prices down to unreasonably low levels as often as it brings them up to unreasonably high levels.

Reality #7 of Investing Today — Buy-and-Hold Is About to Endure Its First Real-World Test.

Buy-and-hold has become a wildly popular investing strategy. It has never yet been tested by a real-world bear market. It seems likely that buy-and-hold will be subjected to its first real-world test in the not too distant future. Given the lack of effective preparation that the “experts” have provided, my strong hunch is that most investors following buy-and-hold strategies will suffer a crisis of confidence.

Reality #8 of Investing Today — The Key to Successful Buy-and-Hold Investing Is Becoming Informed about the Effect of Valuations on Long-Term Returns.

It’s not buy-and-hold that is at fault. It is the failure of the “experts” to inform us of the effect of valuations on long-term returns. Buy-and-hold is a solid idea that has been poorly formulated in its initial incarnation.

Reality #9 of Investing Today — P/E10 is the Answer.

Investing Today

I believe that an appreciation of the P/E10 valuation-assessment tool is the answer for investors confused about how long-term stock investing works. The idea that investors should maintain the same stock allocations when prices reach la-la land levels never made sense; it became popular because the “experts” so often point to P/E1, a terribly flawed valuation-assessment tool. Once P/E10 is used to assess valuations, long-term stock investing begins to make sense; the prices we pay for stocks really do affect the long-term value proposition obtained from them, just as common sense tells us it must.

Reality #10 of Investing Today — The Hardest Obstacle to Getting to Where We Need to Go is Getting the “Experts” to Acknowledge Their Mistakes.

The information we need to become effective long-term investors is readily available to us today. However, most big-name “experts” remain unwilling to acknowledge the flaws present in the investing advice they offered during the huge bull market. Our biggest problem going forward is that old human reluctance to saying out loud those three one-syllable words “I” and “Was” and “Wrong,” words that can fairly by characterized as the three hardest to pronounce in the entire English language.

Personal Finance Advice For the Rest of Us

I’m building an army of some tough sons of bitches.
I’m recruiting my army from the orphanages.And if a shooting star goes by,

— Dylan, “Thunder on the Mountain”

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Aims to Provide Truly Practical Advice.

Most money sites appear to be practical. They avoid discussions of theory and focus on “News You Can Use.” Ironically, that bottom-line approach often does not produce good bottom-line results.

Unconventional Personal Finance AdviceIt is only by getting the theory right that you can identify effective action steps. My aim with this site is to save you time not by writing short articles, but by writing articles rooted in money management ideas that hang together and that will generate more benefits the deeper you explore them and the more often you put them to use.

A strong tips-oriented article hands you a few fish. A strong theory-oriented article (preferably with some tips attached as illustrations of how the theory works) teaches you how to fish.

I make demands on my readers. I do so out of respect. I envision my reader as a man or woman who cares enough about the topic to be willing to work it a bit. I never add words just for the sake of adding words. I add words because I believe they are needed for the article to achieve its desired effect. Ultimately, I see it as impractical to provide you with tips without supplying you with an understanding of the ideas used to generate the tips.

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Takes Its Subject Seriously.

Too often you will be reading a thread at a Retire Early board and someone will say: “I could find evidence to support what I am saying here but that would be too much like work, har-de-har-har!” Yuck! That sort of thing sickens me.

I like jokes. I give extra credit to posts that include jokes as well as strong ideas. But it is never appropriate to treat the money ideas themselves as jokes. When someone is telling me how to save or how to invest or how to advance in my career, I want to know that he has thought through what he is saying and that he is trying with the best of his ability to get it right. Tell me that you can’t be bothered to think through your point well enough to be able to present your case effectively and I find more important things to do with my time. A measure of sobriety is called for when dollars are on the table.

Jokes have their place. I see it as one of my jobs to see to it that the jokes stay in their place.

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Does Not Exclude the Typical Middle-Class Worker.

A small percentage of the population holds most of the wealth. Most advertisements in money magazines are aimed at that segment of the population. So the editorial content of most money magazines ignores a big percentage of the population.

Rob Bennett Offers Exciting New Saving and Investing Ideas

It is my aim to attract people who earn typical middle-class incomes to this site. These people have a lot to teach us. One thing they can teach us is that it’s possible to live a perfectly fulfilled life without buying every new gadget that comes on the market. Those who earn more forget that.

When those who earn less are excluded from money discussions, it’s easy to fall into the trap of thinking that “everyone” is buying all the gadgets. “Everyone” is not doing so because “everyone” cannot afford to do so. Everyone would benefit from coming to understand that the discussions in many of the money magazines are slanted as a result of the desire to appeal to the demographic most favored by the advertisers of high-priced goods and services.

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Disdains Stuffiness.

There’s one way in which most of today’s money advice is plenty “serious.” It looks the part. It’s mostly guys with expensive cars who are viewed as “experts.” Thank heavens for Warren Buffett, who is a wonderful exception to the rule; he doesn’t need to impress you with his car because he has something of significance to say.

I am drawn to money advisors who follow Buffett’s lead. Brag to me about how much money you made in the market and I turn the channel. Tell me what lessons you learned getting from the place where you once were to the place where you wanted to be and you hold my attention.

I don’t like know-it-alls and I don’t like those who pretend to believe that they know nothing only because they don’t want to be questioned on what they say anymore than the know-it-alls do and have found a more effective way to place themselves above the give-and-take from which all true learning experiences arise. Those who know a little something and who are willing to share it with the rest of us are the ones responsible for the insights that have made our little community justly famous in certain corners of the internet in recent years.

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Takes a Skeptical View of the Conventional Advice.

Many sites see it as their role to report faithfully what the “experts” say. What if the “experts” got it wrong? If everyone repeats what they said, without directing fresh thought to the matter, you end up with an endless loop where people report what the experts say because they are viewed as experts and where certain people are viewed as experts because so many people report what they say.

We need to break the chain. Most experts really do have something of value to say and we should of course be grateful for the insights they impart. But the real test of “expertise” is whether the ideas work or not. Much of today’s conventional money wisdom does not hold up well when subjected to that test.

The conventional money advice has failed us.

Can there be any reasonable dispute raised on this point? The middle-class worker of today earns more than did his parents or grandparents. He saves less. What we see all about us today is what a failed money-management approach looks like live and up close.

Money Management Ideas That Work

So why is it that most of today’s money experts repeat the same old clichés as if there were some magic power behind them that was going to cause them to produce better results this time around? It ain’t gonna happen.

Good advice is advice that gets the job done. The conventional saving advice is not getting the job done. The conventional investing advice is not getting the job done.

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Focuses on Financial Freedom.

Most of what we have learned in the first eight years is the result of our focus on the question of how to win financial freedom early in life. It’s because we pursue an ambitious goal that we have been able to learn things that a good number of the “experts” have never imagined.

It’s only those who are pursuing ambitious money goals who are able to determine what works. Why is it that I discovered that the Old School safe-withdrawal-rate studies got the number wrong? It’s because I needed to know the safe withdrawal rate to put together my own plan for early retirement. I read Bogle’s book with thoughts of putting together a Retire Early plan in the back of my head and when I read that valuations always affect long-term returns, a warning bell went off. I recalled that those safe withdrawal rate studies I had looked at earlier had not included adjustments for valuations. I never would have put two and two together had I been planning to retire at age 65 like most others. It was my more ambitious money goal that caused me to pay more attention to what I was reading. It was because I was planning to make personal use of the numbers I was reading that I wanted to make sure that they were accurate.

It works the same way in the saving area. Most middle-class workers view early retirement as out of the question; they feel that they will be lucky if they can finance a decent retirement by their mid-60s. The reality, though, is that anyone who can finance an age-65 retirement can finance an early retirement if he or she puts his or her mind to it. Your money choices affect how soon you attain financial freedom. Most workers pay little attention to those choices. Paying attention to them yields better results. It follows that paying attention to your choices will get you to retirement prior to the conventional retirement age.

Most money advice was developed to appeal to those who don’t pay much attention to their money choices. But those who pay attention to their money choices achieve far better results. Do you see the disconnect? We’re following the followers instead of the leaders.

Most money advice is aimed at the lowest common denominator. People cooked up this stuff to have appeal on broadcast television or in magazines that sold in huge quantities. There aren’t many magazines like that around anymore. Today everything is segmented. But many of us are still listening to money advice that was designed to work “okay” for everyone but not particularly well for anyone. You don’t need to settle for that sort of thing anymore.

Passion Saving

Lots of people retire early. We know that. We have attracted people from all ages, from all income levels, from all parts of the world. These people know what it takes to win financial freedom early in life. It’s these people who you should be listening to, not people who constructed general advice for a general audience of people with a limited desire for doing what it takes to achieve a very special financial status.

There are enough of us today doing remarkable things with our money for all of us to be able to learn a lot from all the rest of us. The Retire Early movement is a movement whose day has come.

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Is Community Property.

I own this site and the material contained in it. But I don’t view this site as in all senses “my” site. This is a community learning resource. I don’t believe that I have a right to exclude all competing points of view from expression in the comments section of the blog. And I don’t believe that I have a right to comment on other viewpoints in an unfair or unbalanced way in the articles that I write. None of this should sound too remarkable. The reality, however, is that other site owners have played it in other ways. I strongly believe that those other site owners are wrong to do so.

The reality is that most of the insights described in the articles posted to this site were in some way influenced by community discussions at the various Retire Early boards. There’s great power in putting your ideas before a diverse group of people when they are still in the formation stage and then adjusting them or refining them or cutting back on them or expanding on them as the result of what you learn through community interaction. I want all community members to know that this is their place, their home.

I won’t be sharing the royalties with you; my wife says that I need to make sure that you don’t get any funny ideas. But I am grateful for the input that has been provided by thousands of smart and kind and generous souls over the past eight years. I am proud of what we have built together. What we have built together is something that no one person could have built solely by himself or herself. All who have a desire to provide constructive input have a right to take part in our deliberations and are entitled to respect for the contributions they put forward. And all of us benefit from the magnificent work product that results from those deliberations.

It’s not just our findings that are exciting. The process by which they are developed is pretty darn exciting too.

Personal Finance Advice for the Rest of Us — PassionSaving.com is Different Because It Is a Learning Site.

Investing for Humans We don’t know all the answers to the question “How do I go about putting together an effective plan for early retirement?” How could we? Our movement will only be eight years old come this next December (this article was posted in July 2007). We’re only just now getting our feet on the ground. We’ve produced an amazing work product already. But the reality is that we are only now warming up for the action-filled days still ahead of us.

We disdain defensiveness at PassionSaving.com. Defensiveness stands in the way of learning and learning must be the focus of a movement only eight years young. We’ll make mistakes. And then we’ll fix them. And in the process of fixing them we’ll learn things even more exciting than the things we had thought we learned when we made the mistakes. We suffer from the uncertainty of youth, but we benefit from the flexibility of youth. There’s good mixed in with the bad, or bad mixed in with the good, depending on how you want to look at things.

This is the web site that provides personal finance advice for the rest of us. My sense is that “the rest of us” is “most of us.” Many middle-class workers have become skeptical of the conventional saving and investing advice. Most lack the background and experience to identify the holes in the conventional approaches on their own. Our purpose is to help them (us!) identify the holes and explain why they do such damage. And then to offer superior strategies, strategies that work in the real world.

How presumptuous of us! If it weren’t our own money and our own lives at stake, we wouldn’t dare to be so bold. But it is our own money and our own lives at stake. So we do what we must.

This isn’t the place to go to get the conventional take on saving or investing. This is the place to go to get the take of those who care enough about what money can do to make a life rich to want to do better than what the conventional advice lets us do. This isn’t the place for those enthralled by the “experts.” It’s the ordinary middle-class man or woman who cares about meeting his or her life, work and money goals who is recognized as the true expert here.

We’re ordinary and we’re not. You don’t need any special knowledge to be a respected member of our club. You do need to want to learn about how to change your money habits in ways that permit you to live a life bigger and bolder and better than the one you live today. That’s a lot. If you’ve got that in you, you’re one of us. If you’ve got that in you, you’ve got something to teach us.

The sky is a blackboard high above you,
And if a shooting star goes by,
I’ll use that star to write “I love you!”
A thousand times across the sky.

— “Teach Me Tonight” (sung by Ella Fitzgerald and Phoebe Snow, among others)

My Ten Favorite Financial Freedom Movies

The Quest for Authenticity in a World of “Plastics”

The first of my ten favorite Financial Freedom Movies is The Graduate.

Financial Freedom Movies

The same thing that drives me to build this site is what makes me love this movie so much. We all seek authenticity in our lives. We all learn that we must compromise ourselves to make it in the world of “plastics.” We all worry that we will make too many compromises and end up like Mrs. Robinson.

The second of my ten favorite Financial Freedom Movies is Lost in America.

This one is about a couple who decides to sell their house and use the money to support their quest to find themselves. Their plans go awry when the wife loses all their money gambling in Las Vegas. The husband tells her that from this point forward she should never again be permitted to say either the word “nest” or “egg” in any sentence dealing with any topic because she obviously does not understand the “nest egg” concept at all well.

The third of my ten favorite Financial Freedom Movies is The Big Chill.

I see this as the sequel to “The Graduate.” It’s the working out of the same ideas 20 years down the road. The characters are about as rich as were Benjamin’s parents and just about as compromised too. They rely on Motown songs and expensive ice cream to get them through the day instead of swimming pools and mixed drinks. It troubles them, though, because they remember watching “The Graduate” and how excited it made them about the idea of changing the world and how determined it made them to change at least their little part of it.

The fourth of my ten favorite Financial Freedom Movies is The Fountainhead.

This one stars Gregory Peck as the architect hero of the Ayn Rand novel who will not compromise his vision for the sake of dollar bills. Some people love Ayn Rand and some people hate her. I say “she was a trip and a half” and leave it at that.

The fifth of my ten favorite Financial Freedom Movies is The Man in the Gray Flannel Suit.

Financial Freedom Community

This is a 1950s exploration of the theme explored from the perspective of the 1960s in “The Graduate.” There’s something in me that finds this theme a compelling one regardless of the time-period that is the setting for the exploration of it. The sorts of decisions that form the drama of this movie are the decisions that determine whether a life is a success or a failure, according to my way of looking at things.

The sixth of my ten favorite Financial Freedom Movies is Start-Up.

This is a documentary about an attempt to get a start-up high-tech company off the ground. A mildly interesting bit of Financial Freedom Community trivia is that I watched this on the night that I put up the first post to the Safe Withdrawal Rate Research Group discussion-board.

The seventh of my ten favorite Financial Freedom Movies is The Temp.

It’s the only horror movie I know of that explores a financial freedom theme.

The eighth of my ten favorite Financial Freedom Movies is Office Space.

I found this only mildly amusing. There are a good number of community members who rave about it.

The ninth of my ten favorite Financial Freedom Movies is Brazil.

Achieve Financial Freedom

I saw this a long time ago and I had other things on my mind at the time and I don’t remember much of it. I do remember it having vivid cinematography, especially in some scenes exploring an oppressed worker/drone theme. I need to see this one again to gain a better idea as to what it is about.

The tenth of my ten favorite Financial Freedom Movies is American Beauty.

This one did nothing for me. I include it on the list because it did at least purport to explore a financial freedom theme. There is supposed to be a scene in which the Joe Dominguez book Your Money or Your Life is pictured. The screen on my television set was too small for me to see it.

Welcome to the Financial Freedom Community!

I founded the Financial Freedom Community in December 1999 to serve as a means for middle-class workers to learn how to overcome paycheck dependence. Links to the ten discussion boards comprising the community are set forth below, along with short descriptions of the nature of the content found at the various boards.

Financial Freedom Community Board #1
The Motley Fool Board (the First Financial Freedom Community Board) 

I first went public with descriptions of the Passion Saving approach to money management with posts that I put to this board in December 1999. For the following year, this was the most exciting board on Planet Internet.

It will cost you some money (about $30 per year) to view the Motley Fool boards, but it is well worth it to be able to tap into the insights offered by the smart, generous, and kind souls who populated this board community during its Golden Age. Those wonderful threads can be found in the Post Archives of this board for December 1999 through January 2001. These threads are the model I look to when aiming to steer our community in a positive direction for today and for years to come. The Post Archives of the Golden Age of the Motley Fool board show the new internet discussion-board communications medium at its very best.

The board has in recent years been overrun with abusive posters and off-topic posting.

Financial Freedom Community Board #2
The Early Retirement Forum 

This is our most rockin’ board today.

This board is owned by Bill Sholar, who got his start in our community as one of the many fine posters at the Motley Fool board during its Golden Age. Sholar is publisher of the FIRECalc retirement calculator, which employs a discredited conventional-methodology safe-withdrawal-rate analytical framework. He has implicitly acknowledged the analytical errors he made in FIRECalc in posts put to the board, but has not been willing to correct the errors in the calculator itself and has instead elected to ban honest and informed posting on the safe withdrawal rate topic at his board. That decision has of course compromised the integrity of the discussions (especially investing discussions) held here in a serious way.

All that said, this a highly active board in which a good diversity of viewpoints is represented. If you have a desire to participate in ongoing discussions of how to win financial freedom early in life rather than just to view archives of good threads generated in an earlier day, this is probably the best board for you.

Financial Freedom Community Board #3
The FIRE (Financially Independent/Retired Early) Board at NoFeeBoards.com 

This board had a Golden Age of its own during the first six months of 2003. A number of the best posters from the Motley Fool board formed this board as a means of escaping the abusive posting that ruined (not permanently, I hope!) the Motley Fool board. The FIRE board was never as well-populated, but because the posters were the cream of the crop from the Motley Fool board, the discussions held here were as a rule even better-informed and better-focused.

This board also was eventually overtaken by abusive posters. It is as quiet and spooky as a graveyard today.

Financial Freedom Community Board #4
The Safe Withdrawal Rate Research Group 

This board took up only investing questions and it was never well-populated. But it offered the most exciting content ever put to a Financial Freedom Community discussion board.

John Walter Russell (now owner of the Early-Retirement-Planning-Insights.com site) published his safe withdrawal rate research here as it was being developed. So SWR Research Group participants saw investment strategy history being written before their eyes in real time. I doubt that there has ever been another internet discussion board at which original research of the significance of the Russell research was presented for community consideration on a post-by-post, insight-by-insight basis. Exciting stuff indeed.

The board was shut down in early 2005 at the insistence of supporters of John Greaney, owner of the RetireEarlyHomePage.com site and publisher of a discredited conventional-methodology safe withdrawal rate study (the REHP study). The archives can be viewed by following the link set forth above and downloading the material from Russell’s Yahoo! briefcase.

Financial Freedom Community Board #5
The Vanguard Diehards Board 

Strictly speaking, this is not a Financial Freedom Community board. This is a board set up for the discussion of index fund investing. However, in recent months there have been several good threads here on topics of interest to the Financial Freedom Community, including discussions of the new Valuation-Informed Indexing approach to investing (please see the section of this web site that goes by that name for background).

This board community has two important connections to our community.

One, it was Vanguard Founder John Bogle’s writings on the effects of changes in stock valuations that helped me see in the mid-90s the grave flaws in the conventional-methodology safe withdrawal rate studies. It was the discussions of those flaws held in our community during The Great Safe Withdrawal Rate Debate that led to our development of the Valuation-Informed Indexing approach to investing and of The New Buy-and-Hold Investing Paradigm (please see the section of this web site that goes by that name for background).

The second connection is that William Bernstein occasionally posts at the Vanguard Diehards board. Bernstein was the first well-known investing analyst to dare to discuss publicly the flaws of the conventional-methodology safe withdrawal rate studies. His identification of the true safe withdrawal rate on Page 234 and the powerful insights set forth in Chapter Two of his book The Four Pillars of Investing were key to the development of both the Valuation-Informed Indexing investing approach and The New Buy-and-Hold Investing Paradigm. Bernstein both confirmed and expanded on his earlier SWR claims in the recent threads.

Financial Freedom Community Board #6
The Raddr-Pages.com Board 

“Raddr”, the owner of this board, is one of three researchers who have developed analytically valid approaches to determining safe withdrawal rates (the others are John Walter Russell and William Bernstein). He was one of the first posters in our community to publicly point out the grave flaws of the REHP study (the study published by John Greaney at the RetireEarlyHomePage.com site), dismissing it as “bogus research.” He was severely criticized for expresssing this viewpoint at the time, but was vindicated by the in-depth examination of the historical stock-return data that took place during The Great Safe Withdrawal Rate Debate.

This board is not nearly as well-populated as the Early Retirement Forum, and the range of topics discussed is narrower. Still, the posters in this community usually generate one or two solid threads per week. If you have the time available to you to do so, it is worth checking out.

Financial Freedom Community Board #7
The RetireEarlyHomePage.com Board 

Not recommended.

Financial Freedom Community Board #8
The Passion Saving Board at the Motley Fool Site 

There were some fine threads developed in the early days of this board. It is not active today. There is nothing essential in the post archives.

Financial Freedom Community Board #9
The FIRE WannaBees Board at the Motley Fool Site 

I have never had time available to study this board at all closely. It appears from a quick review to have a good bit of useful material posted to it.

Financial Freedom Community Board #10
The Moving Out of the Fast Lane Board at the Motley Fool Site 

The same words that apply to the FIRE WannaBees board apply to this one as well. If you have some time available to do so, please check it out and let me know what you think.

Welcome to the Monkey House! — er, I mean, the Community!