Asymmetrical Information - Megan McArdle

02.26.13

A Declaration of Financial Independence

Emergency fund or investment? Do I need to diversify my retirement accounts? And how to save money on food?

Dear Blogger:

I am a recent college grad (23 years old) with about $20K in student loan debt, which I am paying off fairly aggressively. I have about $2K in a savings account and just began contributing to my 403(b).

1. Do you think it's smart to contribute, even though I am still in debt? I plan to invest in an index fund or something aggressive since I have lots of time.
2. Do you think I should invest $1K of my savings account money into the stock market? (Knowing full well that I would have to leave it alone for at least 5 years.)

I am not so worried about having a 3 month salary cushion as I could always move home if I get fired.

Basically, if you were 23 again, what would you do to start yourself off on the right financial path?

Digging out from Debt:

Dear Debt Digger:

I’ve lived with my parents when I was hit with a bout of unexpected unemployment. And my parents had about the sweetest spare bedroom you could imagine: right on top of a subway stop in the middle of Manhattan. Also, my parents are awesome. Seriously. My husband still talks about how awesome my mother was when we had to move in with her three weeks after returning from our honeymoon, due to a combination of unexpected house purchase, and unexpected flooding in our rental house.

Nonetheless, don’t make them your emergency fund.

Let’s be honest: they are your emergency fund. If you get sick, they’ll take you in and care for you. But Calvin Trillin once noted that by the age of 35, almost everyone falls into one of two categories: people who are still being taken care of by their parents, and people who are in some way starting to care for their parents. The second group is the one you want to be in, and it’s easiest if you start now by cultivating the inner belief that you have your own resources to fall back on.

I understand that you want to pay off that debt! As well you should, and good job for being aggressive. If you can pay it off in under 18 months, I give you permission to put everything but $1,000 into your student loan debt, clear it out, and then start using that monthly payment to build your emergency fund. But two years out, an emergency fund you must have. That never goes in the stock market, but sits around and waits, in a boring old savings or money market account, for the inevitable emergency.

Your reward will be in a couple of years when something happens (as it will!) and your Dad says, “Honey, do you need us to help out?” When you can say, “No thanks, Dad, I’ve got it covered,” that will be one of the proudest moments of your life. That kind of independence has a much better ROI than the stock market.



Dear Blogger:

Like many people who have jumped from job to job, I now have 401K type programs with different employers that I have not been required to close out; a couple of them are just sitting. Do you have any opinion on what to do with transfers? I know leaving the accounts where they are means I'm paying fees on each which is a waste of money. However, I am afraid I have gotten very iffy about transferring all of my accounts into one place. It just seems these days all that it takes is one stupid (or corrupt?) person to blow up a company or program no matter how well managed it is said to be. I was in the private sector then moved to a university and now I'm at a federal lab, so logically I could put everything in the TSP. But it seems that transferring all my retirement to my govt sponsored plan when I'm already dependent on them for a paycheck in a time of uncertain budget cuts to come would be particularly unwise. I've also checked into some local banks about transferring old accounts into an IRA but the ones I've looked at have significantly higher fees than both the TIAA-CREF (where my university account is parked at) and the TSP. Am I being too paranoid about this? Should I just dump all the money into one account so to avoid the fees on each? Or does the old saying to not keep all eggs in one basket apply here? For reference I currently have ~125K across all the accounts and I'm 39 so figure I have 25-30 years to retirement.

Distrustful Diversifier

Dear Distrustful:

Your worry is sensible. It is the first principle of investing that you should not put all of your eggs in one basket. However. The degree to which you are carrying it is not sensible.

Don’t get me wrong: I know where you’re coming from. If Jon Corzine, a former US Senator and Governor of New Jersey, can just sort of accidentally lose millions of dollars worth of his customer funds, why couldn’t that happen at Fidelity or TIAA-CREF? I could tell you that some very smart, honorable people I know from business school work at Fidelity, and that they would never do that sort of thing, but as it happens, Jon Corzine also went to my business school, so you may not find that precisely comforting.

However, neither Fidelity, nor the TSP, is about to pull an MF Global. MF Global was a commodity broker that took substantial bets for its own account and had a bewildering array of counterparties in exotic financial trades that you have never heard of. The big mutual funds, including the government ones, are boring vehicles for moving client money into vanilla assets. Nor should you worry that government or employer financing problems will hurt your retirement accounts: you own those accounts, not your employer.

What you mostly need to worry about is keeping fees low, and getting your allocations diversified. Stick with big index funds in broad markets. Put some of your money in a broad-based international fund that invests all over the world (since your paycheck is dependent on the state of the US economy, it’s good to have some assets that are dependent on how some other company is doing. Don’t chase returns by plunging into narrow markets or risky asset classes.

It’s a good thing that you’re thinking about retirement and staying diversified. But don’t get so worried that it occupies too much of your attention. Retirement savings should be “set and forget”: you invest the money in a broad market fund, and then stop worrying about it until you need to.



Dear Blogger:

I work relatively long hours for a financial institution in NYC, (think 12-14 hour days 5-6 days a week). I made the newly graduated mistake of spending way too much on my apartment, hence I'm trying to cut down on eating out. However, by the time I get home I generally only have enough energy/time to stick something in the microwave/toaster oven/pot for 5 minutes to eat. Given that I have one day during the week to cook my meals, do you have food/recipe recommendations that will hold up well during the week, can deal with reheating, and will be more cost effective than eating out?

Famished Financier

Dear Famished:

You, sir, have come to the right place. I too was spending too much on an apartment in New York as a newly minted MBA—except that in my case, since my first “real job” was as a journalist, “too much” was $1,000 a month. I had less than $300 worth of monthly disposable income to cover sundries like food and laundry. So I feel your pain, perhaps even more acutely than you do.

Tight as money may be, I am going to advise you to do a little upfront investment. The first thing you need is a slow cooker. You are young, and you may want to occasionally leave your apartment on the weekend. So get a nice big slow cooker which will let you get things started, and then cook the food for you while you run around doing all the fun things that you moved to a great city to experience. I like the Instant Pot, which is also a pressure cooker, but if you want something cheaper, this Crock-Pot does a fine job.

The second thing you need is a copy of the Cook’s Illustrated Slow Cooker Revolution cookbook. This has basically all of my favorite slow cooker recipes, except for a few of my own creation. It has enough soups, stews, chilis and pastas to keep you eating for weeks. I particularly recommend the turkey chili and beef bourguignon.

The third thing you need is a dozen or so of these Ziploc containers, which are perfect for a single serving. Spend a weekend slow cooking two dishes (one per day), and then put most of it in the freezer in these containers. During the week, pop one container out of the freezer (two if you’re really hungry) and microwave until bubbling with the lid off. Pair with a microwave-in-bag vegetable such as broccoli or green beans, finished with a little butter or olive oil, some lemon juice, and a bit of salt.

Then for the next few weekends, you slow cook once a weekend: spend half an hour in the morning prepping, pop it in the slow cooker, and you’re free for the day. When it's done, you eat some, freeze most of it in the Ziploc containers. Now you’ve got a freezer bank of a variety of foods; you can have something different every night. After that, you can slow cook every weekend, or every other weekend, as it suits you (and the square footage of your freezer); you’ll always have something tasty in the freezer.

If you have the counter space, and are starting to miss roasts and steaks, you may take the money you save this way and invest in a sous vide machine and a vacuum sealer. A day long (or multiday) sous vide cook can turn cheap cuts of meat as tender and tasty as filet.  Prep them on the weekends, seal them in bags, and pop in the freezer. Toss them in the water bath in the morning, and then come home to a nice, toothsome cut of meat that only needs a minute of searing to be perfect. Pair with a pre-bagged salad and a simple oil-and-vinegar dressing.

This way of eating is cheaper and less fattening than eating out every night, and tastier than popping a Stouffer’s in the microwave. And after you’ve done this for a little while, you’ll have at your command a dozen delicious and economical dishes that you can entertain with. Which you should do, because otherwise why are you shelling out all that money for an awesome apartment in a great location?

Ask the Blogger Runs at the beginning of every week.  Send your questions to mcmeganmoney@gmail.com