Bookshelf

I was going to rant, but frankly Ben Stein in today's Times said it better than I ever could. So instead, here are some books that I've found helpful:

Making the Most of Your Money by Jane Bryant Quinn: A very complete, non-hysterical guide to personal finance. Good sections on insurance, real estate, and investing.

The Overspent American by Juliet Schor: A look at what drives the spending side of the financially stressed consumer. Schor's main point is that each of us identifies a 'reference group' of other people or families. We tend to maintain a lifestyle that more or less aligns with the lifestyles of our peers (as in keeping up with the Joneses). If middle managers in your town live in 4-bedroom Tudors and drive Toyota Camrys, that's what you'll try to do. Schor has done some research that suggests that individuals now tend to get their reference groups mostly from television and other media, and this tends to skew what they think of as "normal" spending and consumption patterns. (What does a typical kitchen look like on TV? Does it look like yours?)

Financing the American Dream by Lendol Calder: Originally a doctoral dissertation, this is an excellent history of consumer credit in the United States, from the time of the Civil War through the end of the great depression, with some discussion of post-WW II trends. Among the interesting material, a history of the "myth of lost financial virtue." As far back as the 1860s, commentators have been writing that the current generation has abandoned the frugal, prudent ways of its parents. (In fact, the first thing I look at when reading contemporary books on PF, such as the Number, is whether the author passes this bit of mythology on. Most do, including Eisenberg.)

Irrational Exuberance by Robert Schiller: Disclosure: this book saved me a ton of money between 2000 and 2003. In the first edition, Schiller debunks the idea that stocks "always do better than bonds" and "return an average of 10% over time". The second edition does much the same thing for house prices. The book spends a lot of time looking at the received knowledge about investments (the stuff that "everybody knows") and about how what he calls "naturally occurring Ponzi schemes" or bubbles come about. I found the material on stocks more persuasive that treatment of real estate, since he doesn't adequately address the geographic differences (land is a readily available commodity in some places, highly scarce in others).

The Two-Income Trap by Elizabeth Warren and Amelia Warren Tyagi: Very much in the vein of Strapped. Pressed to afford the cost of real estate in areas with good schools, young families tend to take on as much mortgage debt as they can. Banks treat all household income the same (a 1-income household earning $100,000 can get the same loan as a 2-income household where each person earns $50,000), but Warren and Tyagi argue that the resulting situation is much riskier for the two-income household than the 1-income household. Why? Maintaining two incomes creates many additional household costs (daycare, a second car, household services) and when a family depends on two incomes to make ends meet, the loss of either job can be crippling. The single-income household is typically better protected, since the non-working spouse's labor reduces household expenses, and in case the primary earner loses his or her job, the non-working spouse can typically provide at least some earned income.

Coming up Short by Annika Sunden and Alicia Munnell: A well-researched look at how 401(k)s compare with traditional pensions. In an ideal world, where workers contribute to their 401(k) plans and they don't withdraw the funds when changing jobs, 401(k)s have the potential to provide nearly as much income as traditional pensions. But too many workers don't contribute, and too many take distributions (or loans) while working. Also, not enough attention is paid to encouraging retirees to annuitize part of all of their 401(k) balances. (Annuitization lets you trade a lump sum for guaranteed monthly payments for the rest of your life. The payment is typically larger than you could receive by investing the lump, since when you die your heirs get nothing. This shared-risk component -- like life insurance -- is one of the things that made pension plans work.)