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THE LITTLE BOOK OF MAIN STREET MONEY

Introduction: Let the Rebuilding Begin

IT MAY BE A SHOTGUN WEDDING. But trust me, you and Wall Street could learn to love each other.

In 2008 and 2009, we have been hit with what is arguably the worst financial debacle since the Great Depression of the 1930s—a devastating mix of plunging share prices, crippling consumer debts, slumping home prices and rising unemployment. And things weren’t exactly hunky-dory to begin with. Consider the financial backdrop. In recent decades, traditional company pensions have been disappearing. Retirements have grown longer and hence more expensive. Financial choices have become more befuddling. Job security has faded. College costs have soared.

What to do? We don’t have much choice: We need to seize control of our financial lives, embrace the markets, and be smarter about money than ever before. For most of us, this is a daunting proposition. Wall Street is tough to love. Markets skyrocket one moment, plunge the next. The lingo is baffling. The complexity can be mind-boggling. And the stakes are huge. Feeling nervous? Fret not. If we can keep some simple truths in mind, we could make this marriage work.

In fact, a firm grip on financial basics has rarely been more important. This is a moment of extraordinary doubt--about the stock market, about the housing market, about the economy, about our future prosperity. To rebuild our finances, we need to cast aside yesterday’s fanciful thinking and profligate ways, and get back to first principles. Don't let today's economic mayhem distract you: The value of time-tested financial truths still endures.

This Little Book may run a modest 36,000 words and writing it may have taken just a fistful of months. Yet, to me, it represents a lifetime of work, pulling together the many ideas I have wrestled with and advocated during my quarter century watching Wall Street and writing about money. Eighteen of those years were spent at The Wall Street Journal, where—as the newspaper’s personal-finance columnist—I tried to help regular investors make sense of their finances. More recently, I have endeavored to do the same as Director of Financial Guidance for Citi Personal Wealth Management.

This book, however, is more than just a compendium of useful financial ideas, though there are plenty of those in the chapters that follow. Rather, it reflects the financial philosophy I’ve developed over the years. The tax rates, historical returns and other gory financial details mentioned in these pages will soon be out of date. But I hope the philosophy espoused here—the way of thinking about financial issues—will have lasting value.

That philosophy encompasses seven key beliefs I have harped on again and again during my career.

• 1. Money is a means to an end. It isn’t an end in itself. Before we buy a mutual fund or purchase an insurance policy, we need to figure out why we’re amassing money and what we are looking to protect. If we don’t know what our goals are, we may not settle on the right strategy and we’ll be less inclined to make the necessary sacrifices.
• 2. We shouldn’t neglect today. We’re often encouraged to save for distant goals, like our toddler’s college education and our own retirement. But this is an awfully long time to wait for financial nirvana. My advice: Also strive for peace of mind today. That means getting our debts under control, living comfortably within our paycheck, ensuring we have the right insurance, devising a plan for financial emergencies and spending our money on the things that matter most to us. Indeed, if we take care of today, we will likely find we are also taking care of tomorrow.
• 3. We need to think harder about what we want. We imagine that our lives will be somehow transformed if we win that next promotion or we buy the bigger house. But even when we get our heart’s desire, eternal satisfaction eludes us. As we take care of today and prepare for tomorrow, we need to think much harder about how we spend our money and how we spend our time.
• 4. Money is emotional. We struggle to save regularly and we find it difficult to invest rationally. There’s the prudent, unemotional strategy. And then there’s the plan that we can live with. If we’re going to be contented stewards of our money, we need to settle on strategies that will get us to our goals—and that we’ll stick with along the way.
• 5. Our financial lives are bigger than we think. Managing money isn’t just about our stocks, bonds and mutual funds. There are also our debts, our homes, our financial promises to our children, our income-earning ability and so much more. To handle our finances wisely, we need to consider the whole as well as the parts, so we can make key tradeoffs, spot opportunities and figure out what’s missing.
• 6. We should focus on the things we can control. We may not be able to influence the inflation rate, the direction of bond yields or what happens to stock prices. But there’s much we can control, including how much we save and spend, how much we pay in investment costs and taxes, how much investment risk we take and how we react to the markets’ ups and downs. My suggestion: Let’s stop worrying about the things we can’t control and focus on the things we can. This is a humbler approach to managing money—and yet one that’s often more rewarding.
• 7. Simplicity is one of the great financial virtues. Most of us may never understand credit-default swaps, commodities backwardation and mortgage derivatives. But we don’t have to. It’s possible to make good money using straightforward strategies and plain-vanilla mutual funds. In fact, simpler is usually better, because it will often involve lower costs and less chance for foolishness. Moreover, if we stick with simple strategies and simple investments, we will likely understand what we own—and that should make us more tenacious when we’re tested by turbulent markets.

The above seven points guide my thinking, influence my own finances and infuse the pages that follow. Everybody’s financial situation is a little different and the specific suggestions offered in the next 21 chapters may not be right for you. Before you make any decisions, you’ll want to consider a host of factors, including your stomach for risk, your goals, your income, your nest egg’s size and your tax bracket. Still, whether you invest on your own or you rely on a team of financial advisers, I hope the philosophy and financial principles advocated here will help you better manage your money.

In the spirit of the Little Book series, I have tried to keep this book short, so that it is accessible to even the most financially phobic. With any luck, you will like what you read and you’ll want to share this book with your friends, neighbors, siblings and—maybe most important—your adult children. As I wrote each chapter, I often thought about the ideas I want to pass along to my children, Hannah and Henry, who are on cusp of the adult world. To make those ideas easy to digest and easy to understand, I have attempted to cut out all verbal flabbiness, distill my thinking down to some key notions and express myself as succinctly and clearly as possible. I can’t promise to have achieved those goals. But I tried mightily.