Financial Planning for the Totally Innumerate (Part 1: Savings)

The Scenario:

You’re a 21 year old aspiring novelist living on restaurant tips in one of the most expensive cities on earth. Multisyllabic words fly forth from your typing fingertips like shimmering butterflies, but you can’t balance a checkbook to save your life. Holiday meals with your investment banker father and lawyer mother are like an extended sermon from the Book of Isaiah – according to these sober-minded folks, you’re basically doomed – a hopeless romantic who’d be better off teaching high school, which would at least give you health insurance.

Are Mom and Dad Right about You?

They’re right in some respects. Your situation is risky. After paying the rent on the cockroach-infested garret you share with three aspiring musicians and stocking up on Ramen you’ve got maybe $40 a month left over to play with. You’re young, you’re healthy, and your personal needs are few – a stack of good books on the bedside table, time to write, and the occasional beer with friends. Still, if disaster strikes, you’re looking at a humiliating bailout from the First Bank of I-Told-You-So.

Meanwhile, that $40/month is literally piling up in a shoebox, haunting you from the back of your closet. You’re not about to start playing the stock market, but you know there’s got to be a better way to save toward that ominous Future you keep hearing about.

Think of Zvi Bodie as the benevolent, numerate uncle you never had. A professor of management at Boston University and the co-author, with Rachelle Taqqu, of Risk Less and Prosper: Your Guide to Safer Investing, uncle Zvi doesn’t want to kill your dreams. You’re young, he says, now is the time to take the risks and absorb the experiences that may pay off down the road in the form of authorial greatness. But while you’re at it, he’s happy to offer a bit of free financial advice without treating you like a total moron.

Personal Finance Tips for the Innumerate, from Zvi Bodie:

See how little you can live on: You’re already doing well in that department, but every little thing adds up. Buy deli coffee instead of Starbucks, or make your own at home and carry it in a Thermos. Buy clothes at thrift stores (real ones – not the trendy kind where the clothes cost more than they would new).

Pay down your debts, if you have them: As an aspiring novelist, your future earning potential is – well – a bit shaky. If you’ve got student loan or credit card debt, paying off the interest would be a good use of that $40/month.

If you’re debt-free, consider investing in US treasury bonds. Around the world, and in spite of the recession, US Treasury bonds are considered a dependable investment. They’re insured against inflation and you can buy and sell them online at any time. The stock market, says Bodie, is a risky investment even if you know what you’re doing, and not to be trifled with – especially with money you can’t afford to lose.

Don’t try to become an expert in finance, but don’t outsource your decisions, either. You’re a novelist. You don’t have time to read textbooks on investment strategy. But neither, says Bodie, can you afford to ignore financial matters or outsource them to professional advisors who are trying to sell you insurance or a mutual fund. Take your finances as seriously as you take major health decisions – you don’t have to be a doctor to do some research, ask the right questions, and get a second opinion.

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