22 of 22 people found the following review helpful:
3.0 out of 5 stars
Intriguing concepts, but not enough practical advice, March 7, 2010
This review is from: Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life (Paperback)
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The premise of this book is that understanding the larger context of a decision will help you make better decisions.
It considers each financial decision within the broader context of a person's life journey ... a journey that it characterizes as being all about converting potential human capital (your ability to earn) into actual financial capital (the fruits of your revenue generating efforts).
At the start of your journey, you are rich in potential, with all your finances tied up in your abilities (the analogy used is of an oil well). In a very shallow way, your progress through life can then be viewed as the process of converting your potential human capital into actual dollars and cents.
To make its case, it relies on two key principles - that of a 'holistic' balance sheet and that of 'income smoothing'.
The idea of a holistic balance sheet is one that considers not just your measurable assets and liabilities, but also a measure of your earning potential (your "human capital"). The idea behind "smoothing" assumes that you could use a combination of debt and earnings to even out your income as well as your expenditures for each year that you live.
What worked for me:
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The book provides a very clear reasoning as to why education is key, and how different career choices can have very different impacts on your earning potential. Needless to say, this was a chapter that I read together with my son. Obviously, while financial payoff is not the only criterion in the selection of a career, its still important for kids to learn how this choice has long term implications.
The idea of consumption smoothing is an intriguing concept since it not only implies that it is okay to take on debt early on in your career, when your consumption far outstrips your limited income, but also states that it's okay not to save much during this period of relative hardship.
What didn't work:
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It really bothered me that I couldn't find a significant correlation between the contents of the book and its marketing blurbs. For instance, I found nothing that would help me "learn how to diversify [my] marriage, pensionize my kids, and enjoy a greater retirement income." Likewise, the device of using basic arithmetic operations (add, subtract, multiply, divide) to help make financial decisions seemed to be "cutesy" and artificial - and something only a publisher would think up. The unfortunate part is that the book would have been a good read without relying on these marketing hooks.
The book approaches personal finance as an academic treatise rather than as a folksy exploration (a la Suze Orman). Almost every page in the book contains references to studies, surveys, statistics, research papers, articles, and the like. This results in a very information rich book, but it also makes it harder to extract the key nuggets of information from it.
There are also minor typographical/construction errors that you'll run into in the book (the use of "alternate" as a synonym for "alternative" being the most egregious), but nothing that's too distracting.
Conclusion:
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This book relies on the principle of teaching a man how to fish, and so it is neither a primer on personal finance, nor is it a workbook. It is not even an how-to manual. What it is, is a book that helps you understand the psychology underlying personal finance decisions.
In the end, however, everything boils down to there not being enough practical advice. For instance, the chapter on debt indicates that individuals who are ignorant of the basic principles of debt end up paying more, but it doesn't say much about those basic principles.
All that being said, there are some good rules of thumb that you'll find in its pages. For instance, avoid using higher tax withholdings as a form of forced savings; or that borrowing from your 401(K) is prudent especially when your expected rate of return on your 401K funds is lower than the interest rate that you expect to pay.
Would I recommend it to family? Yes, I would. But only after warning them about what to expect.
Hence my overall rating of 3 stars ("It's Okay").
The chapters that are particularly worth reading are: Chapter 1 - which will be useful in helping your child (or yourself) navigate career choices; Chapter 3 - which shows why you should consider raiding your 401(k); and Chapter 7 - which provides a unique way of looking at extended warranties.
Happy Reading!
~Damodar
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9 of 9 people found the following review helpful:
5.0 out of 5 stars
A Nice Alternative to Traditional Financial Self Help Books., June 6, 2010
This review is from: Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life (Paperback)
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Unlike many authors who write self help books, Milevsky is a university professor, not an advisor. As a result, this book, heavily influenced by the behaviorist school of economic thought, takes a very different tact when it comes to approaching important financial issues (milestones) in your life. Milevsky's most important contribution is to insist that one add "human" capital to any balance sheet of assets and liabilities. Such balance sheets are a common tool among advisors, but people often fail to include their most valuable asset: themselves. Doing so radically changes one's approach to financial issues.
Consider for example the issue of debt. Americans are heavily in debt, though less so in the wake of the recent financial crisis (savings rate are actually up from negative numbers to around 6%). Is this debt healthy? Most people who offer financial advice, including myself, would say no. Mortgages are a conspicuous exception. But Milevsky modifies these assumptions with two important points. The first is, when you assume the debt is at least as important as how you assume it, and second, the sources of the debt are equally important. Even consumer debt, the big no no of financial advisors is Ok, provided you take it in moderation and early in life. What you are effectively doing, the author suggests, is moderating your consumption over your life. Your future earnings are likely to be higher and you are trading some of those earnings for a slightly higher standard of living today.
On the other hand, debt when you are older is quite dangerous.
A number of interesting points follow from this analysis. First, student loans, which represent a large burden, should be viewed as an investment in human capital. (Invest wisely. A history major may not be the best choice.) But a home may not be a wise investment before one is 40. It is not diversified and if future income streams are variable, or if you have to move often, renting may be the best solution for younger workers. In the final analysis, the author's main debt advice: don't diversify your debt the way you do assets. Too many people have debt on multiple credit cards with different rates (why not consolidate to the lowest one?) and make sure that as the income from your human capital increases, you give up debt and start saving for the future.
Viewing human capital as an asset also changes one's financial perspective when it comes to saving for the future. All too often, advisors suggest that "risk tolerance" and "time horizons" are the main features for deciding how much to invest and where. Milevsky recommends instead that you look at your income stream. Some people's income is already closely tied to the market and they should diversify into bonds. That way income and investments do not take a hit simultaneously. By the same token, some people with modest income, like teachers, tend to enjoy relatively small changes in income with changes in economic climate. These people are actually best suited to assume more risk in the stock market, provided, of course, that they can make up losses with additional work.
In short, this book does not offer so much "practical" advice (buy stock x!) as it does an outlook. Milevsky argues that when you construct your own balance sheet, you should not forget the value of your human capital. And when you include that figure, which is actually quite large for younger people, decisions about money become much easier to understand and navigate.
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3 of 3 people found the following review helpful:
3.0 out of 5 stars
Could have been so much more, April 30, 2010
This review is from: Your Money Milestones: A Guide to Making the 9 Most Important Financial Decisions of Your Life (Paperback)
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I usually enjoy reading books on finances and financial decisions and thought this particular entry into that niche looked very interesting. To cut straight to the bottom line - I wanted to like this book more than I actually did. It wasn't a waste of time for me, but I didn't get out of it nearly as much as I had hoped. The subtitle is "A guide to making the 9 most important financial decision of your life" and the blubs on the back talk about this being a "practical roadmap to a financially sound future". That's what I was expecting, but that's not what I got.
On the plus side, this is a more holistic view of financial decisions than many other published books provide. Really thinking about your income stream over the course of your lifetime and thinking about smoothing things out rather than looking at your earning years separate from your retirement years was very helpful. I also thought the author did take on the sacred cow of homeownership (sort of) as not necessarily being the absolute right answer. I have actually done the math and by the time you pay property taxes, maintenance, and repairs, plus and remodeling or update necessary prior to sale, homeownership isn't necessarily all it's cracked up to be. He talks about renting may be a better solution for many people, but doesn't do very well at explaining much about the costs of ownership including is mowing the grass or repairing the toilet how you want to spend your weekends (and your life energy).
He has a good discussion about people spreading their debt over multiple instruments and the high cost of doing that, but doesn't get into that people who max their credit cards, then take out a home equity loan (or other lower interest rate device) only to rack up the credit card debit or other consumer loans really is worse off than before. The academic side of this particular discussion totally ignores people's propensity to continue doing what they have always done even when it gets them in significant trouble.
Overall - some good bits and pieces and some nuggets worth reading but it fell short on many fronts.
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