Your Money Milestones’ Refutes Mainstream Financial Wisdom
Calling Moshe Milevsky’s views on personal finances unconventional is an understatement. Who else but this York University business professor and author of Your Money Milestones (FT Press, $19.99) has the audacity to write things like the following?
•Not enough people borrow from their 401(k) retirement plans.
•Parents should think of their kids as financial assets, not liabilities.
•You’re wasting money on insurance.
Before you dismiss Milevsky’s views as nutty, think about this: How well did following the conventional wisdom work for you in 2008 and early 2009?
Milevsky confesses that mainstream financial planning rules caused half of his family’s net worth to disappear between November 2007 and mid-March 2009. He bought and held onto an ultralow-cost, globally diversified portfolio that included stocks of solid companies.
“I lost hundreds of thousands of dollars by doing everything exactly right,” he says.
The experience caused Milevsky to rethink everything about money.
In the past, he thought about markets as a kind of roulette wheel. With enough data about historical behavior and outcomes, the argument went, you could predict the odds of success and make money with reasonable confidence.
Today, he takes the nuclear approach. You can’t predict a nuclear accident using history or statistics, and you can’t predict the next market meltdown. What you should do, Milevsky says, is concede that the future is unpredictable and then manage your most important financial decisions with clearheaded math.
For example, you should spring for a costly top-flight education when you’re young, so the investment can pay off handsomely over the long term.
When investing, take more risks if you have a job with flexible hours and an income that’s relatively immune to a recession. If your financial capital takes a hit, you can fall back on your human capital. Conversely, if your job is tied to the economy or the stock market, invest conservatively.
Milevsky gets a little too cute trying to turn his approach into principles of addition, subtraction, multiplication and division. And the book isn’t really about money milestones. It’s about the best way to think about money.
The author’s theoretical principles make the most sense when he brings them into the real world. Take borrowing. Milevsky says we’re thinking about debt all wrong.
Too often, he notes, we err by diversifying our debts the way we diversify our investments. We have credit cards, car loans, mortgages and home equity lines, paying off debt at different rates. Instead, you should use your low-rate debt to pay off your high-rate debt and stop incurring high-rate debt.
Americans could save billions yearly if they borrowed from their 401(k)s and used that cash to pay off their high-interest debt, Milevsky says. You won’t owe interest or tax penalties, so you’d likely “earn” more by erasing the 18% credit card interest than you’d make keeping the money invested in your 401(k).
Parents should also rethink the way they perceive their kids economically. Milevsky says children are actually hidden assets. “Your kids can function like pensions,” he claims. In most families with an above-average number of kids, Milevsky argues, odds are at least one child will help the parents financially in their advanced age.
Milevsky’s best advice concerns insurance. Don’t buy extended warranties or trip cancellation insurance. Similarly, don’t choose low deductibles for your auto and homeowners policies (which raise your premiums).
Instead, buy insurance to protect against huge expenses that could cause financial hardship and self-insure ones you could truly handle. Keep some just-in-case money in the bank to tap for these minor emergencies.
Milevsky calls his account the family’s Personal Insurance Reserve Fund and recently used the cash to repair a basement leak and a fender bender. “But the Reserve Fund is still showing a large surplus,” he writes.
By Richard Eisenberg, Special for USA TODAY