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Freakonomics: Everything You Always Wanted to Know About Money (But Were Afraid to Ask) →

“Americans are not financially literate.”

I have a love/hate relationship with Freakonomics. It can be very holier-than-thou in its perscriptions & discussions of economics. This episode falls closer to the love end of that spectrum. The discussions are all centered around financial literacy for normal people, and they discuss the now-famous 9 rules for finanacial success:

  1. Strive to save 10-20% of your income
  2. Pay your credit card balance in full each month
  3. Max out 401(k) and other tax-advantaged savings accounts (e.g. 529)
  4. Never buy or sell individual stock
  5. Buy inexpensive well-diversified index mutual funds & exchange traded funds
  6. Make your financial advisor commit to the fiduciary standard
  7. Buy a home when you are financially ready
  8. Make sure you’re protected by insurance for life-changing costs (but not the small things)
  9. Do what you can to support the social safety net (allows us to protect each other from risks which would crush us if we faced them alone)

The podcast discusses each other them in greater detail, but I definitely feel that all of these apply to me, even though I’m fairly young. Understanding as little about personal finance as I do, this was a welcome episode. If I had to pick just one rule to focus on, I would pick 2. It is so easy to get crushed by credit card debt. Each month, the balance you carry accrues 15% interest: take your balance and multiple it by 1.15 to get your new interest. Some credit cards have even higher interest; it’s not uncommon to see 20% & 30% rates for carrying a balance on a credit card. Even if you barely (or don’t) save, starting from 0 is a heck of a lot easier than starting from -$3,000 (next month, it’ll be -$4,025!).

There was a cursory discussion of index funds in this episode but if you want to listen to the full discussion, listen to the full episode.