‘Your Money Milestones’ Refutes Mainstream Financial Rules; Borrowing Against 401(K) Leverages Low-Rate Debt

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March 12, 2010 Friday FIRST EDITION

SECTION: MONEY; Pg. 4B

LENGTH: 552 words

HEADLINE: 'Your Money Milestones' refutes mainstream financial rules; Borrowing against 401(k) leverages low-rate debt

BYLINE: Richard Eisenberg

Calling Moshe Milevsky's views on personal finances unconventional is an understatement. Who else but this York University business professor and author of Your Money Milestones has the audacity to write things like the following?

*Not enough people borrow from their 401(k) retirement plans.

*Parents should think of their kids as financial assets, not liabilities.

*You're wasting money on insurance.

Before you dismiss Milevsky's views as nutty, think about this: How did the conventional wisdom work for you in 2008 and early 2009?

Milevsky confesses that mainstream financial planning rules caused half of his family's net worth to disappear from November 2007 to mid-March 2009. He bought and held onto an ultra-low-cost, globally diversified portfolio that included stocks of solid companies.

"I lost hundreds of thousands of dollars by doing everything exactly right," he says.

The experience caused Milevsky to rethink everything about money. In the past, he thought about markets as a roulette wheel. With enough data about historical behavior and outcomes, the argument went, you could predict the odds of success and make money with reasonable confidence.

Today, he takes the nuclear approach. You can't predict a nuclear accident using history or statistics, and you can't predict the next market meltdown. What you should do, he says, is concede that the future is unpredictable, then manage your most important financial decisions with clearheaded math.

For example, spring for a costly top-flight education when you're young, so the investment can pay off handsomely over the long term.

When investing, take more risks if you have a job with flexible hours and an income that's relatively immune to a recession. If your financial capital takes a hit, you can fall back on your human capital. Conversely, if your job is tied to the economy or the stock market, invest conservatively.

The author's theories make the most sense when he brings them into the real world. Take borrowing. Milevsky says we're thinking about debt all wrong.

Too often, he says, we err by diversifying our debts the way we diversify our investments. We have credit cards, car loans, mortgages and home equity lines, paying off debt at different rates. Instead, you should use your low-rate debt to pay off high-rate debt and stop incurring high-rate debt.

Americans could save billions yearly if they borrowed from their 401(k)s and used that cash to pay off high-interest debt, Milevsky says. You won't owe interest or tax penalties, so you'd likely "earn" more by erasing the 18% credit card interest than you'd make keeping the money invested in your 401(k).

As for kids, "Your kids can function like pensions," he claims. In most families with an above-average number of kids, Milevsky argues, odds are at least one child will help the parents financially in their old age.

Milevsky's best advice concerns insurance. Don't buy extended warranties or trip cancellation insurance. Don't choose low deductibles for auto and homeowners policies (which raise your premiums). Buy insurance only to protect against huge expenses that could cause financial hardship. Keep some money in the bank for minor emergencies.

Eisenberg is a freelance writer based in New Jersey.

Your Money Milestones

By Moshe A. Milevsky

FT Press

224 pages, $19.99

LOAD-DATE: March 12, 2010