Book Review > The Little Book of Main Street Money: 21 Simple Truths That Help Real People Make Real Money

Main Street Money is based on a philosophy of wealth creation that encompasses seven key beliefs:

1. Money is a means to an end;
2. We shouldn’t neglect today;
3. We need to think harder about what we want;
4. Money is emotional;
5. Our financial lives are bigger than we think;
6. We should focus on he things that we can control; and
7. Simplicity is one of the great financial virtues.

It is written by Jonathan Clements who has more than thirteen years experience as the personal finance columnist with the Wall Street Journal. In writing this book he has attempted to condense his extensive experience into a set of simple truths that he could pass onto his adult children.  And he has been successful. 

‘Our working years can be viewed as a period when we amass financial capital so that one day we can live without the income from our human capital.¹’  Clements suggests that a person with a long time to retirement and secure regular employment could diversity that bond-like income with investments in stocks. He counsels against investing heavily in the same economic sector as where a person is employed.

Everything’s a trade-off. There are three basic choices about how to spend income: purchase one item or another; purchase today or tomorrow; or decide what to save for. Clements gives some advice about how to make the trade-off that delivers the most happiness.

He also recommends addressing financial goals concurrently rather than consecutively; he suggests saving for retirement from an early age and limiting expenditure on other things.

1. Buy experiences, rather than things;
2. Count your blessings;
3. Strive for a sense of control;
4. Find a purpose;
5. Give a little; and
6. Make time for friends and family.

He supports the ‘pay yourself first’ strategy and argues that saving from an early age more than another other strategy is the key to financial independence later in life.  Paying down debt should be thought of as a conservative investment strategy, not unlike buying high quality bonds.

Clements recommends saving as soon as you enter the workforce to take advantage of compounding and persevering until you investment gains at least equal the amount that you are adding to your savings. On the question of where to place savings he suggests that people design their portfolios to avoid devastating short term losses but also protect themselves against the long term threat of inflation.  He recommends simple, low-cost vanilla mutual funds for long term investment. Approaching retirement, investors should lighten up on stocks without removing them completely from their portfolio. In retirement, he recommends holding a cash reserve equal to five years’ spending money so that the investor can ride out a long bear market without being forced to sell riskier investments.

Investors should worry less about short term market performance over which they have no control and more about risk, investment costs and the tax implications of the investment vehicles that they are using. Index funds are recommended because of their low investment costs, they trade sparingly and the ‘relative certainty’ of capturing the performance of the underlying index. The key driver of a portfolio’s risk and return is the split between stocks and conservative investments. ‘If portfolios are a little calmer, we are more likely to stick with our investments, so we earn the handsome returns that can accrue to long-term investors².’ Clements provides an example of a balanced portfolio based around US stocks and bonds.

In relation to home ownership Clements recommends buying the house that is needed rather than the one that is desired and putting the money saving into high quality investments.

Clements recommends avoiding insurance when you can afford to shoulder the risk yourself and raising deductibles and extending waiting periods. Insurance should be reserved for those situations which represent a financial disaster.

There are factors we have little or no control over, like whether our employer gets into financial trouble or whether our parents are wealthy or poor. But there are factors that we can control, like our spending habits, whether we look after our health and whether we endeavour to raise money-smart kids. We shouldn’t feel badly about the things we can’t control – and we should focus on the things we can³.

This book is written for people at all stages of life.  In many ways there isn’t much new here.  It’s more a neat collection of good advice that we need to be regularly reminded about. It is heavily vested in the American situation in relation to retirement income, social security, taxation and bonds which severely limits its usefulness for Australian readers but the general advice is relevant for Australian investors.

What we need is a similar book for the Australian situation.

Lesley Ann Smith is a member of the AIA.

1. P7

2. P95

3. P187