Since you're such a financial genius, what financial advice can you offer me?

Everyone's financial situation is obviously different, but here are some general rules:

If you can afford it, pay off your credit card debt. You're probably paying 12 to 18 percent interest, none of which is tax deductible. Before you invest in the stock market, your best investment is simply to pay your credit cards off.

Check your credit bureau report every six months or so. You'd be amazed at how easily incorrect information can show up on your credit report. There are three major credit bureaus so you'll want to subscribe to a service that lets you see your credit reports from all three bureaus.

If you can afford it, keep at least six months of living expenses in cash or a cash-like investment (e.g., a short term bond fund).

Obtain overdraft protection on your checking account, which means you don't have to worry about bouncing checks.

"Consumers Reports" is excellent for low end and medium end goods, but less so for high end goods. If you want to spend $20,000 or $40,000 on a new car, it will be very helpful, but will be less helpful if you want to spend $80,000.

Consider total cost of ownership ("TCO") in everything you purchase. At the beginning of my essay on total cost of interaction, I provide an explanation of TCO.

If you're going to drive a new car for only two years and then sell it or turn it in, then leasing almost always makes sense. A new car usually suffers a huge hit in depreciation during the first two years, and the leasing company is responsible for that, rather than you.

Number portability has been mandated by the FCC, which means you can switch mobile phone carriers and keep your telephone number. Some carriers may attempt to impose a substantial termination fee if you terminate too early. I've had OK service with Verizon Wireless and I doubt any of the other carriers are any better.

If you lose or damage your mobile phone, you can often get a new one for free or at a substantially reduced cost if you agree to extend your plan for an additional year.

If you know you're going to be in your apartment or house for a long period of time, and you can afford to do so, then buying it often makes sense. Also, housing is unusual in that it is both an investment and consumption.

If you can afford it and interest rates are high, a 15 year mortgage makes a lot more sense than a 30 year mortgage — you'll own your house in one-half the time with your monthly payment not being that much higher. (The lower interest rates are, the less true this is.)

Assuming you have sufficiently good credit, for most people it makes sense to have an American Express credit card and two VISA or MasterCards. American Express is often the best credit card to use — they provide better service than VISA or MasterCard, their statements are easier to understand, they're easier to deal with if you dispute a charge, and if you have a Gold Card, they provide a very good year-end summary. Not all merchants accept American Express, however, because their fees to the merchant are higher. VISA and MasterCard credit cards are preferable to their debit cards because many systems (particularly Web-based systems) cannot process debit cards.

If you have your own business or supplemental income, you should consider having two checking accounts and two credit cards, one for solely your personal expenses and one for your business expenses. When you (or your accountant) do your taxes, you simple look at all the entries in your business checking account and your business credit card statement.

Before you make any investment, evaluate the fees and transaction costs. At the high end, for example, art dealers such as Sotheby's and Christies charge a 10 percent commission to the seller and also a 10 percent to the buyer (sometimes waived for very good customers). If you purchase a painting for $100,000, it really is only a $90,000 painting, because the seller only netted $90,000, yet you paid $110,000 for it. So the painting has to appreciate 22 percent before you break even.

In making investments, diversify as much as possible. Don't invest in anything you don't understand.

If you want to invest in public equities (common stocks in public-traded companies) for the long run, you might consider simply following Value Line, which has had a remarkable track record for 50+ years. Simply open an account at an inexpensive on-line brokerage firm (e.g., AmeriTrade or eTrade) and purchase X shares of the 30 stocks they most recommend. Alternatively, if you have at least $250,000, I can introduce you to an investment manager I use, Kimball Halsey of Radius Capital Management, LLC, who has consistently beaten the Standard & Poors 500 market index for several years in a row.

If because of your profession you need to worry about being sued (e.g., you're a OB/GYN and you deliver babies), you should consider sheltering your assets in an off-shore asset protection trust. One of the leading asset protection attorneys, Dennis Kleinfeld, starts with a trust established in the country of Belize (because Belize has repealed the concept of fraudulent conveyance), which then is a member of a limited liability company in Nevis (which is hostile to suits by creditors). Needless to say, these are expensive and complex and should be considered only if you have sufficient assets to protect.

Read James' essay, Total Cost of Interaction.

October 14, 2004, version 1.2   |    List of other essays written by James Mitchell    |    Copyright notice

Cite as “Some Financial Advice” by James Mitchell. October 14, 2004 version 1.2..
www.BostonConvivium.com/jm_essays/financial_advice.