The Dow Jones website Marketwatch recently posted an article titled ‘Dilbert’ deserves the economics Nobel, which refers to a 9-point financial plan that appeared in Scott “Dilbert” Adams’ 2002 book Dilbert and the Way of the Weasel. It sounds pretty sensible and seems to be in line with what is considered to be sound advice.
According to the article, Adams tried to have this nine-point plan published as a one-page book, but none of the publishers would bite. He then decided to include the plan in Way of the Weasel, and I’m reproducing it below:
- Make a will
- Pay off your credit cards
- Get term life insurance if you have a family to support
- Fund your 401k to the maximum
- Fund your IRA to the maximum
- Buy a house if you want to live in a house and can afford it
- Put six months worth of expenses in a money-market account
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
- If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio
Points 1 through 5 seems to echo what a lot of financial planning books say. Canadian readers who’ve read David Chilton’s The Wealthy Barber will have a sense of deja vu (I believe that Canucks can compress points 4 and 5 to “Fund your RRSP to the maximum”). I might want to diversify my funds a little bit, but 10% of my income has automatically been routed to my RRSP for some time now.
(I’ve got to make a will soon. It’ll be pretty simple: The Ginger Ninja gets everything, save enough money to send a courier to leave a flaming bag of horse manure at the doorstop of my deadbeat ex-housemate.)
Point 6 is so simple it almost seems silly, but I suppose it had to be stated rather than implied.
I used to have a stash like the one suggested in point 7 — a habit I picked up during my days as a self-employed contractor — until my deadbeat ex-housemate effectively drained that resource. I just kept it in short-term guarateed investment certificates which I’d renew. I’m working on rebuilding the ol’ safety net and will have to see what the upsides and downsides to using a money-market account are.
Point 8: Interesting. Once again, I’ll have to do some research. Here’s what the article had to say about it:
Thanks to Adams’ formula, the average irrational investor can ignore Wall Street: “Everything else you may want to do with your money is a bad idea compared to what’s on my one-page summary. You want an annuity? It’s worse. You want a whole life insurance policy? It’s worse. You want to invest in individual stocks? It’s worse. You want a managed mutual fund instead of an index fund? It’s worse. I could go on, but you get the point.”
Check the bottom line: A portfolio with an asset allocation of 70% in Vanguard’s Total Stock Market Index and 30% in the Total Bond Market Fund is doing just fine, performing remarkably close to the S&P 500 index. Moreover, that simple two-fund portfolio is perfect for the vast majority of America’s 95 million investors who are passive much as Adam’s Dilbert character.
I’m going to have a chat with both my financial advisor and my father-in-law (I’ve learned more about real-world business just by talking with him than I did in my commerce courses at Crazy Go Nuts University) sometime soon.
I’m sure that I’ve got people who live, breathe and think finances the way I do with computers — any thoughts?
7 replies on “"Dilbert’s" 9-Point Financial Plan”
I’ll add one more. When you’ve done 6. Try and pay the mortgage off quickly and early.
Interesting that the whole thrust of the plan is less debt, not more. And you’re biggest debt is probably your mortgage.
Those of us in this industry who lived through Bubble 1.0 know it’s not going to go on for ever and you will (almost certainly) go through times when you have no job and wonder if you’re ever going to have a job again. Having no debt makes those times enormously easier to cope with. And doing 7. can let you do things and join up with people that otherwise you couldn’t even consider. I hate sweat equity and business plans that require not paying the programmers but sometimes that’s the only way.
Ok, I might know how to save a nickel or two so I’ll take a kick at some of these.
Mostly with 6. you need to be aware of what country you live in. If I am not mistaken, in the US the interest paid on your mortgage is tax deductable and it is not in Canada. Also you need to be able to understand the math between renting and buying. This is a good article that explains it.
It is also important to understand the concept of leverage. The people you know who made a killing in real estate did not buy something for $10 and sell it for $11. They bought something something for $10, only paid $1, borrowed the other $9 and then sold it for $11, making $1 on their $1, doubling their money, after returning the money they borrowed. If the thing went down to $9, they would have been wiped out. Leverage cuts both ways.
With mortgage insurance in Canada you are buying insurance to protect the bank, not yourself. And if you put the price of the insurance in your mortgage, you pay interest on it to.
With 7 there are more options than before. A money market fund works, but you can maintain the same liquidity ( ability to get your cash in a hurry ) in some short term bond funds thay pay a bit more. You should be careful with GIC’s as they can only be cashed at maturity which is usually a year. With these you give up liquidity and don’t get paid more for that. Laddering them is a way to get around this. Ladder by buying one a month, instead of buying them all at once. That way, one matures each month and you can either roll it over or spend it if you need to. Depending on the frequency you find yourself hitting this emergency fund, a bank line of credit or even your credit card can act as this safety net too if it is only once every 5-10 years.
8 is the equivalent of telling someone, “just get a Windows equipped PC”. It will do the job. Without getting exotic, two things to watch for are the ratio of stocks to bonds changes depending on the person and the amount of time they have left until they retire and, again maybe just in Canada, you need to be sensitive to your tax situation as returns from stocks, index funds and bonds are all taxed differently, depending on whether they are inside or outside of your RRSP ( Canada’s IRA / 401k ). Also not all index funds are created equal and as one part of a economy gets too hot ( tech in the US, commodities in Canada ) they can become very sensitive to the effect of this one sector, when the original goal was to maintain an even balance of all sectors.
Adding a bond fund is kind of like drinking mixed drinks instead of doing shots. The mix gets you there a little later but the ride is not as rough either.
Generally, taxes take the biggest chunk out of your investment returns. Commissions and fees are a distant second.
-E
That’s a silly thing to do. I got the mortgage on my house at 4.5%. At that rate, I’m not going to pay it off too terribly early because beating a 4.5% return elsewhere should not be difficult, particularly in an environment of rising interest rates.
I don’t know what the 401(k) and IRA maximums are, but here in Canada the RRSP contribution limits are quite generous. So generous that if you contribute the maximum, as Adams recommends, you may not have anything left over, e.g. a down payment for a house. So you might want to keep some back for that purpose. Apart from that, however, I’m a big fan of putting all leftover cash into the RRSP. A self-directed RRSP allows you to have part of the funds in liquid form, e.g. a money-market fund, so even the six months of expenses can go in and you can take it out again if needed. You won’t get taxed on the interest, and you won’t be as tempted to dip into it.
Adams’ points 4 and 5 don’t say anything about what to do with the money in the 401(k) and IRA. I don’t know anything about those, but here in Canada you can have a self-directed RRSP where you can do almost anything. There is no easy answer here; for one thing, if you have money both inside and outside, you should take an integrated approach for tax reasons.
Point 8 is a tricky one because in the event of a serious market downturn most people panic and sell – usually at the bottom. So while “never touch it until retirement” is great in theory, in practice it may be wiser to replace the stock index and bond funds by things like principal-protected notes and a bond ladder respectively. As much as I respect Scott Adams, I doubt that he considered the psychological impact of a serious bear market, given that the last one (1973-74) happened when he was a teenager.
Two things to note …
One, in addition to translating points 4 and 5 into “Fund your RRSP to the maximum”, one might also want to say how the RRSP funds should be allocated, e.g. 60% stock index fund / 40% bond fund. The RRSP allocation does not necessarily need to match the non-RRSP allocation.
Also, the 70/30 allocation mentioned sounds o.k. for someone young who’s willing to take a moderate to high amount of risk, but it might be a little too agressive for someone nearing retirement.
In reply to anonymous and anonymous arguing against paying off your mortgage. Please bear in mind we’re talking about Dilbert here, not a professional real estate speculator. And Dilbert needs a roof over his head. And he needs some protection from interest rate swings. Some of us remember rapid rises in interest rates that meant sudden and scary rises in monthly mortgage payments. And that in turn leads to people losing their houses and ending up in bankruptcy courts.
Dilbert doesn’t want or need that kind of risk. He needs a roof over his head and a good long term investment in bricks and mortar.
Ummm… I may be wrong here, but I think Adam’s was making a joke (odd for a cartoonist I know).
Point 6. means “Buy a house” not, get a mortgage. They are all like that… basically assuming you have virtually infinite money. If you have the money to do all these things clearly you will retire in comfort. The advice is all foolproof, because it assumes you have the money to do each step – therefore it’s also useless – thus the joke – and I assume the comment on many of the “financial planning” plans.
Analyzing the points is… pointless. It’s the same joke really as “How do you become a millionaire? Well, first you get a million dollars…”
Anyway, that was my take, maybe I missed something.