The 1-2-3 Money Plan Part 1

The 1-2-3 Money Plan.

The Three Most Important Steps to Saving and Spending Smart.

Gregory Karp.

Acknowledgments.

Wisdom in this book does not come from me alone.

The great information herein can be largely attributed to the many experts who have agreed to talk with me through the years.

Wisdom also comes from readers of my national newspaper column, "Spending Smart," and my previous book, Living Rich by Spending Smart. Literally hundreds of readers have called and e-mailed to ask questions, share their collective wisdom and experiences, or just thank me for providing straightforward advice, which is the only way I know how to give it. They are a continuing inspiration to tackle new spending topics each week in my column and pursue larger publis.h.i.+ng projects. For all of those collaborators, I am grateful.

I'd also like to thank editors at the Morning Call newspaper in Allentown, Pennsylvania, where I work. Editor Ardith Hilliard and managing editor David Erdman have been supportive of my national newspaper column, "Spending Smart," which is published in Tribune Company newspapers. They have also made allowances for my nonnewspaper writing.

Thanks to Jim Boyd, executive editor at FT Press, and reviewers Russ Hall and Michael Thomsett. A special thanks to Jeanne Bonner for meticulously reviewing the ma.n.u.script.

Thanks, too, to Clark Howard, author and host of the Clark Howard Show on radio. Clark's encyclopedic knowledge of consumer issues is an inspiration. One conversation with him, in particular, led to the idea for the format of this book-of providing just three tasks for each money topic.

To family, friends, and colleagues who have taken an interest in my books, thank you. Your support means a lot.

Most important, thanks to my immediate family-Rebecca, Jacob, and Michael-for your support and accommodation as I finished two books in 15 months. Your love and understanding mean more than you know.

About the Author.

Gregory Karp is an author and journalist of 20 years. His national newspaper column, "Spending Smart," is published in papers that together have millions of readers. The weekly column appears in the Chicago Tribune, Baltimore Sun, Hartford Courant, Orlando Sentinel, Allentown Morning Call, and others. The column has twice won a Best Column Award from the Society of American Business Editors and Writers, in 2006 and 2008.

He is also author of Living Rich by Spending Smart: How to Get More of What You Really Want.

Greg's advice on spending money smarter has appeared in national magazines, such as Newsweek and SmartMoney; television broadcasts, such as WCBS in New York, WSB in Atlanta, and WPVI in Philadelphia, and literally dozens of newspapers nationwide, from the Los Angeles Times to Newsday in New York.

He maintains a Web site at www.gregkarp.com and blog at SpendingSmart.net.

Greg lives near Philadelphia with his wife and two sons.

Introduction.

Telling It Straight.

This book is, admittedly, a low-tech device. But it's meant to offer advantages you find in a high-tech GPS navigation system for your vehicle and an iPod audio player.

In navigating money and spending issues, especially in these challenging economic times, I hope you'll find this book as helpful and succinct as a GPS device that gives driving directions in an unfamiliar region. And in simplicity, it's meant to be as easy to use as the ubiquitous iPod music player.

Fortunately, you don't have to be a gadget lover to use it.

Getting from Here to There.

I like my GPS navigation system, a Garmin Nuvi. I suggest you buy one, after you get your money life in order and are spending your money smarter every day.

No. It doesn't have to be that brand or model of GPS navigator. There are many good ones-ones with different features and less-expensive ones that still get the job done. But, the Garmin Nuvi is a very good line of GPS systems for nearly everybody. And if you drive often in unfamiliar areas, you should buy one.

This brief suggestion is indicative of this book. I intend to give you very specific advice about spending and handling money.

"Garmin," as I unimaginatively named my GPS system, tells me, turn by turn, how to get from where I am now to where I want to go. I don't mean that it lists directions and a map on a screen. While I'm driving, a voice inside the small box mounted on my dashboard speaks directions and road names-albeit, sometimes with butchered p.r.o.nunciations.

Garmin doesn't care where I started, even if I'm lost to begin with. And it doesn't always give me the absolute-best route to where I'm going. But Garmin gets me where I'm going, almost every time.

Garmin also provides me peace of mind. While driving in unfamiliar areas with confusing traffic patterns, I don't care that Garmin isn't providing the absolute-best directions-directions that might get me to my destination two minutes sooner. I care that it gives me clear, understandable directions and gets me where I'm going safely.

In an unfortunate parallel world, Garmin might have a fatal flaw. It might have a Shakespearean Hamlet complex, contemplating "To be or not to be." It would be much less useful.

What if at every intersection it spoke something like, "Turn left on Maple Street...or go two blocks and turn left on Main Street...or, if you're in a hurry, avoid the upcoming busy intersection and cut through the Cherry Blossom housing development on the left...or if this is rush hour, make a U-turn and take the on-ramp to the bypa.s.s"?

Huh? Driving at 40 miles per hour and with little time to make a decision, directions that offer every route would be nearly useless. How am I to choose the best route of those given? "Garmin, that's what I paid you to do!"

And so it is with financial advice.

Consumers view many financial books as they would the indecisive GPS navigator. The books typically provide a confusing array of money advice that covers every possible situation. Advice is rendered nearly useless because the consumer has to make several complicated decisions he or she feels ill-equipped to make. The reader ends up needing advice in order to take the advice.

Sometimes, you just need a Garmin to tell you what to do. This book intends to be your Garmin in navigating money issues, so you can get where you want to go, with as little confusion as possible.

If I may stretch the metaphor one last time: When I'm driving and I disobey Garmin-refusing to "turn left" or "take the ramp on the right" as instructed-Garmin simply recalculates new directions for me based on where I am now. You see, though Garmin is giving me specific advice, I retain the right to choose my own way.

And so it is with this book. University of Chicago professor Richard Thaler, the father of the study of behavioral economics, calls it libertarian paternalism. Basically, it means that leaders can use what we know about consumer behavior to get people to do the right things for themselves. So, in this book, I will nudge you in a direction that is likely to be good for you. That's the paternal part. But, of course, you retain the free will to modify or disregard the advice and choose a different direction. That's the libertarian part.

This book does not restrict your freedom to choose. Nor does it advocate blindly following advice without understanding it. You have the power to customize the advice to your own life. The benefit of the book is providing you with a framework for making decisions, and at the very least, showing you what a good decision looks like.

Simple as an iPod.

If you want to discuss simplicity, it's hard not to talk about Apple's iPod digital music player. This handheld device allows you to move music, audiobooks, and even movies and TV shows from your computer to the device for on-the-go listening and viewing.

Arguably, it is not the absolute-best music player on the market. Others offer more features and even better audio quality, some reviewers claim. Many are less expensive. But none is easier to use. And for that reason, the iPod blows away the compet.i.tion in sales. And for that reason, I recommend you buy an iPod if you're interested in taking your audio and video with you.

My in-laws wanted a digital music player. Knowing I'm a gadget guy, they asked me what I would recommend.

In my mind, answering this question is complicated calculus. That's because I'm aware of the many offerings among music players. I know the iPod's strengths and shortcomings. I could have given them a dissertation on all the available models of music players and all the possible features they could get. After hearing all that, my in-laws' minds would surely be swimming with a slew of seemingly disconnected facts and considerations. They would have to make a long series of complicated prerequisite decisions just to make the one decision they cared about: buying a music player.

In answering their question, the lengthy dissertation played inside my head, but what I said was this: "Get an iPod. It's the easiest to use. You'll love it."

And they do.

Easy Is Hard.

This might be at once the most controversial and most helpful money book you have ever read.

Why?

Because I'm going to give you very specific advice on what to do to handle your money better and improve your spending habits. I'm going to name names and tell it straight.

For example, I'll tell you to invest in index mutual funds. If you're having trouble choosing a company to buy index funds from, go with Vanguard. You won't be disappointed. I'll tell you never to buy an extended warranty-ever. I'll suggest what type of wireless cell phone plan to get-or switch to. Where it's impractical to give specific brand names-maybe because offerings change too quickly-I'll tell you specifically, step-by-step, how to determine for yourself how to choose.

The wonderful secret of personal finance nowadays is much of it is "set it and forget it." There are things you have to do once and never bother with again until your life circ.u.mstances change. You can put your bills on autopilot and set up an investing plan and not worry about it.

Taking decisive stands in advice-giving is risky, especially for a journalist like me who is accustomed to providing both sides of the story. And I'll concede up front that people's financial situations do, in fact, differ. But so many people are overwhelmed with the numerous choices for spending and investing their money that they freeze. It's too easy to get the deer-in-the-headlights look and do nothing at all. In that way, the ma.s.sive financial tomes that attempt to cover every option actually do a disservice.

This is borne out time and again, as I read through and respond to hundreds of e-mails every year from readers of my "Spending Smart" newspaper columns published in Tribune Company newspapers. These readers don't want to know what all the options are, necessarily. They want quality advice on what they should do. What specific action should they take?

An acronym we learned as children is appropriate when dealing with money. It is KISS. It stands for Keep It Simple, Stupid. With money, simple does not mean unsophisticated. You can keep it simple and KISS your money worries good-bye.

Ask any financial adviser about it: Some people just want to be told what to do. They will not invest the time and effort to learn about a subject and investigate all the alternatives. They're sitting ducks for rip-offs, bad spending decisions, and, at best, money mediocrity.

This book will infuriate some people, those whose livelihoods depend on making finances as confusing as possible in the areas of investing, insurance, and telecommunications, for example. It will infuriate some companies whose products are not recommended in favor of their compet.i.tors' offerings.

However, it will help the average consumer take control of his or her money life with minimal effort, allowing the person to make better spending decisions every day.

When Good Enough Is Good Enough.

I don't pretend to proffer only original ideas. After all, details change but the basics of personal finance remain the same throughout time. Writings from the Bible to Benjamin Franklin visit the same themes about money.

My contribution is taking literally volumes of information and boiling them down to what you need to know. Granted, it's what I think you need to know. And what I think is based on what's safe and what's "good enough."

I heard the concept of good enough expressed most clearly when I was interviewing personal finance guru Jean Chatzky about her book, Make Money, Not Excuses. She didn't invent the concept of good enough, but that's where I heard it, so I'm more than happy to give credit.

"The truly great thing about 'good enough'-and the reason it is so powerful-is that it allows you to get to the starting line in a way that waiting for the ultimate, best possible result does not," Chatzky writes.

Good enough means just that. Every money decision doesn't have to be the very, absolute best you could possibly do. Sometimes good enough is good enough. You will accomplish your goals. Get it done and get on with your life. After all, so many of us don't want to devote innumerable hours to dealing with our finances and picking nits with our spending.

"Give me something appropriate and smart to do, and I'll be happy with that," some people think.

Of course, other people are wired to always want the best, to strive for ultimate excellence in all they do. This works well in some areas of life, but not so well with money.

To those people, I would contend that sometimes good enough is, in fact, well above average. Go back to the topic of index mutual funds. With index funds, you'll get decidedly average returns-essentially whatever a market index returns. Yet most people would do far better if they invested in simple, boring index funds, rather than pursuing elusive market-beating returns. Instead of juggling a retirement portfolio of wide-ranging and overlapping investments, most would be best served in a low-cost target-date fund composed of index funds. It's simple, and you're virtually guaranteed to do better than most investors because index funds outperform two-thirds to three-quarters of actively managed (stock-picking) funds. Index funds and target-date funds more than qualify as "good enough."

We need to do smart things with our money, but we'll drive ourselves crazy wading through thousands of options in a hopeless quest for that absolute-best thing. Sometimes good enough is good enough.

Is This Book Different from Living Rich by Spending Smart?

My previous book, Living Rich by Spending Smart: How to Get More of What You Really Want, covered a lot of ground. It provided literally hundreds of tips about spending. Feedback from readers was overwhelmingly positive. Even true cheapskates seemed thrilled to find tips they had never seen before.

I was struck by one poignant comment left by a reader on the book's Amazon.com Web page: "I'm age 70. Living Rich [by] Spending Smart has opened my eyes as to how much money I have thrown away. I hate this book. It makes me ashamed of myself. On the other hand, this knowledge will make living entirely on Social Security a lot easier."

Of course, the book's goal was to inspire smarter spending rather than induce shame. But the point is that many people found it changed the way they think about spending.

This book is different. Though it touches on some of the same topics, it is altogether unlike the first one. This book provides concrete structure and linear sequence to the many money issues that too often seem to move like wafting puffs of smoke in a breeze.

Instead of striving to deliver more tips, we endeavor to visit fewer-only the important ones most likely to be useful to you.

A bigger difference, however, is this book pushes ahead, beyond spending. We talk about many aspects of your financial life, such as improving your credit rating, planning for retirement, and paying for kids' college expenses. Of course, we look at those areas with an eye toward spending and saving smarter.