February 18, 2003
Darling Kim, Tina, and Jenny,
To repeat a story that I have told you: When Daddy and I got married nearly 28 years ago,
we had very little money in the bank. We used most of it to go on a wonderful
honeymoon in Bermuda. Then we lived for a year at an apartment (Topaz House) on
East-West Highway, where we squirreled away $10,000 in just one year, on relatively low
salaries (under $40,000). Because we were frugal that year, we were able to buy our first
house (6915 Fairfax Road), leaving (I’m not making this up) $50 in the bank. I said to
Daddy: “Nothing must go wrong.” Unfortunately, a drunken doctor managed to run into
our car on the way to work after the house inspection. We nearly had to ask relatives for
help, but somehow we were able to patch things together to close on the house!
Over the past 28 years, we have managed to save for our retirement, meet our tuition
expenses (which are astronomical!), take terrific vacations to England, Maine, and the
West, buy a bigger house and then expand it, and live a very comfortable life. What you
may not know, is that we have made our share of mistakes, e.g., we invested in a tax
shelter that made money for the financial adviser but lost money for us. But all in all, we
have done OK. We wanted to share with you some of the lessons that we have learned
over the years, with hopes that they will help you continue to learn how to manage your
own money effectively. Here are some ideas:
1. Avoid credit card debt.
It is very important to learn from the beginning to live within your means (income), even
BELOW it. When people build credit card debt (that means they don’t pay for all the
things they charged during the month, but only make a “minimum payment”, then they
get behind, because you have to pay a very high interest rate (10% to 20%) for the loan.
In other words, if you owe the credit card company $1,000, you end up paying an extra
$200 or so JUST TO PAY THE INTEREST. What a waste of money! It is better to use
CASH for things you need. Just try very hard to pay your credit card balance each month.
Better to DELAY getting a car if you can then avoid credit card debt. Corollary: IF you
do have some credit card debt, try to pay it off as quickly as possible. STOP charging
things. Make a plan to pay off a bit each month until you have no more debt.
2. Start saving for retirement early and save as much as you possibly can.
The benefits of starting to save for retirement in your 20’s instead of your 30’s are
enormous. There are profiles that show that if you start saving in your 20’s you have
maybe twice what you would have if you start in your 30’s. This is because of the power
of compound interest. The money you save in your 20’s keeps earning interest… and then
interest on the interest … year after year until you need it in your 60’s. Fantastic. Also,

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often employer will match a portion of your savings (e.g., in a 401K plan). For example,
if you invest 6% of your salary, your employer might put in an additional 2% or 3%. You
always want to save AT LEAST enough to get the maximum employer match. And then
try to save more, up to 10% or 15% of your income. You will be really glad you did this
when you are older!
3. Buy term life insurance, not whole life or universal life.
Insurance agents sell pricey whole life and universal because it earns them huge
commissions. But in order to buy as much insurance as you need to protect your
dependents (kids), you need to buy term life insurance. You can buy a 10-year or a 20year level premium term or something like that, but what you want to avoid is whole life
or universal. Also, if your employer offers extra group life insurance, try to maximize
this. This tends to be a good deal especially when you are older. You can review your
term insurance every few years, you don’t lose (as you would with whole life) from
locking in a new level-term premium every few years. Make sure that it has a premium
that is OK for as long as you will need the coverage.
4. Diversify your investments.
Over the past 28 years, we have seen times when the real estate market takes off and then
crashes, and houses sit on the market for years. We have seen the stock market lose
something like 50% of its value over the past few years. One thing people don’t realize is
that when interest rates increase, bond prices (hence VALUE) of bond funds tends to
plummet. Different sectors of the stock market (e.g. technology) have also had
boom/bust cycles. The bottom line here is: DIVERSIFY. It is good to have a good share
of your assets in your house, and a mixture of stocks, bonds and cash (money market).
As you get older, the share in the stock market should decrease, because the stock market
is very volatile. (You don’t want to lose everything when you are about to retire.)
5. Mutual fund index funds are better than individual stocks.
It is better to invest in a NO-LOAD (no commission) index fund than individual stocks.
To invest in individual stocks, you have to know an awful lot about the companies. And
you need to have a financial adviser that you really trust. The problem with financial
advisers is that they probably have incentives from their firm to steer you to certain
stocks. With no-load mutual funds, you pay no commission, and your return mirrors the
overall stocks in that index.
6. Never invest in anything you don’t totally understand.
You are better off parking your money in the bank than investing in something some
adviser tries to pitch to you that you don’t fully understand. He/she is probably out for a

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huge commission. Don’t invest in any partnerships and schemes … they are bound to be
losers for you and winners for someone else. Ditto for universal life insurance. We once
bought, and later dropped, a universal life policy. And a Prudential agent once talked us
into an annuity that wasn’t right for us. Watch out for slick sales presentations. Read good
financial advice books (e.g., Suze Orman, Ric Edelman) so that YOU are armed with the
knowledge that you need and the confidence to reject deals that sound too good to be true
(they are never as good as they sound!)
7. Go for a fixed rate mortgage.
We have built up a lot of equity (i.e., ownership) in our home in large part by having a 15
year fixed mortgage at a good rate (6.75%). Adjustable rate mortgages (as opposed to
fixed rate mortgages) are good under some circumstances, but when rates go low (say
under 7%), it isn’t bad to lock in a fixed rate unless you think you might move in the next
few years. Do think about trying to have your mortgage paid off before you retire. BTW,
interest that you pay on a mortgage is MUCH better than interest that you pay on car
loans or credit card loans: it is tax deductible! (The government wants to encourage home
ownership because it stabilizes society). This can save you 20 to 40% of the cost … it’s
deductible!
8. Keep track of your expenditures; budget your money.
People often get into debt unwittingly … they buy furniture, a car, go on a vacation, go
out to dinner several times a week … not to mention having a baby or a major illness. It
is very important, especially when your income is low and/or volatile, to have a budget
plan, and to monitor your expenses against your budget. There is great software to help
you do this. When Daddy and I first got married, we kept the roughest of notebooks and
would sit down once a month and try to figure out what happened to our finances.
Communication, and shared values/goals about money, are really important and it is good
to agree on a basic plan early on!
9. Be skeptical about financial advisers.
I am all for investing retirement funds through your employer plans (actually, you have
little choice about this). But when you switch jobs, you might want to take the money out
and invest through a firm. Just be very careful and go slow, and never trust anyone else
with your money. EVERYONE has a financial interest in trying to get more of your
money. The stock market will go up and down more than they will ever predict. Be
cautious (but not overly so) with the stock market. But even more important, discount
everything financial advisers say … this is YOUR money! As you get closer to
retirement, be even more cautious.

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10. Make a will early on … and certainly before having children.
The most important thing to consider is guardianship for your children (i.e., who will care
for your children in the event neither parent is alive). But it is important also to have a
will for financial protection of your loved ones. If you die without a will (i.e.,
“intestate”), the state does unpredictable things with your money that you might not have
liked! Keep an eye on estate tax laws and respond accordingly.
Finally, remember that YOU have a lot of control over the income side of your life! You
will be well-educated and ready to take on the world, and you will have some control
over your income. This year, one of my new year’s resolutions was to increase my salary
income by $20,000. By early February, I succeeded in increasing my hours worked by 7
per week (at least for a few months) and this will contribute substantially to this goal.
Remember to think creatively about your options and take charge!!
Hope that this helps you manage your money and help you live in the manner (beyond
the manner!) to which you have become accustomed!!
Love and kisses,

Mommy
Shearer Palmer family financial planner 