Advanced Personal Finance

I went with a friend yesterday to his bank because it was a nice day here and I wanted to get out of work for a couple of minutes at lunch.  I realized as we stepped into the bank that I haven’t physically been in a bank in well over five years.  My bank, USAA, is in Texas, so I’ve also never stepped foot in my own bank.  Between online banking, mail, and ATMs, why would anyone ever go to the bank?  It still baffles me that you see lines of cars at bank drive-throughs on Friday and Saturday.  Who still deposits a check?

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On Comsumerist, this morning is a link to get a free FICO score.  I took a look at the link and wanted to share a bit of myFICO’s User Agreement I found particularly interesting:

“Even if you choose to opt out of permitting us to disclose your personal information to third parties, you consent to the free and unrestricted exchange of information, including your credit report, among the Providers [’Fair Isaac in conjunction with TransUnion Consumer Solutions LLC (TCS), a wholly owned subsidiary of TransUnion, LLC and with the assistance of third parties, such as Equifax, Inc., that provide related services or from which we obtain your credit report (collectively the “Providers”)’] for the purpose of verifying your identity, updating TransUnion LLC’s consumer credit database, and providing your FICO®-Scored TransUnion Credit Profile to you.”

The way I read this, even if you actually take the time and considerable effort to opt-out, you’re still not really opting out.  The various credit bureaus and their information providers (e.g. Choicepoint) will still be trading the information you provide to get the report to update their databases.  It’s not like you explicitly give permission for them to do this anyway, but I still find this galling.  I guess it’s true - nothing is free.

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I see references to and reviews of The Millionaire Next Door all the time on the various personal finance blogs I frequent. The reviews are almost invariably glowing and many people swear by the book. That’s fine. I read the book and liked it very much. However, I have a serious problem with one aspect of the book, namely that the authors completely ignore survivorship bias.

Survivorship bias is excluding failures from consideration. It comes up when mutual fund families trumpet how great their funds are. What they don’t tell you when they say their funds average 25% return per year is that they’ve folded or merged 8 out of 10 funds they started. The same thing happens in this book. The authors, Thomas J. Stanley and William D. Danko, go on and on about how many millionaires are entrepreneurs of often mundane businesses. They also tell of hidden millionaires that got rich saving hard and investing wisely.

Here’s the bias, though. They exclude from consideration all the people who start businesses, mundane or exotic, who failed. They exclude all the people who invested poorly. The thesis of the book is to live below your means, invest your money, preferably start a business, and you’re likely to become a millionaire, too. It’s not that simple. You have to consider all the possible outcomes when you take an action. By excluding the possibility (or in the case of starting a business, the likelihood) of failure, Stanley and Danko seem to paint a rosier picture than I believe is warranted.

Like I said, I liked the book. It’s a good read. I recommend it. You just have to keep in mind that there are other possible outcomes.

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We have a three year old daughter and one on the way. So a few weeks ago, I set up a 529 account for our second child (our first already has one). In case you don’t know, a 529 is a tax-advantaged way to save for school expenses. Savingforcollege.com has an excellent website all about them. Anyway, I established the account but doing so got me thinking again about whether paying for your kids’ college education is a good idea. Here’s my thinking:

Pros:

• Child graduates (hopefully) with little or no school debt.
• Child doesn’t have to work during school.
• Earnings are free of federal tax (i.e. it’s cheaper) and we get a state tax deduction today

Cons:

• Child has little or no direct financial interest in making wise us of the opportunity
• Value of the education has less meaning for child

My wife is strongly in favor of funding college to the best of our ability. She feels not having a potentially large debt hanging over your head when you first start out is what’s most important. I agree with that, but I also tend to think anyone is not going to value something as much if it is simply given to them rather than them earning it. Now obviously the child will be earning the degree, but I’m talking about the paying for it. I just think it’s less valuable to them if they didn’t pay for it. On the third hand, I ‘paid’ for college with a combination of working and loans. Since what I really did every semester was sign a boring loan document piling on more debt instead of writing an actual check, I didn’t feel like I was paying for college at all.

At any rate, we’re saving for both of their educations using a 529. I guess the goal should be to raise them to value the opportunity and send them off into the world debt-free. And that’s what we’ll try to do.

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Checked Treasury Direct today and they got the bonds I sent in the mail to convert into electronic form.  They’ve all been converted.  My account now shows the value of each bond along with pertinent details about the bond.  So the cycle is complete - all our savings bonds are now no longer paper.  Just have to remember not to lose my account number and password.

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