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Rob Berger

How and Why to Track Your Net Worth

January 12, 2021 by Rob Berger

Your net worth, more than any other financial metric, gives you a window into your financial health. In one number you see the affects of every financial decision you’ve ever made. Here’s why its so important and how to track your net worth for free.

Track your Net Worth
Table of Contents
  • What is a Net Worth Statement
  • Net Worth Statement vs a Budget
    • Time Period
    • Transactions that Affect our Net Worth and Budget
      • Getting paid
      • Paying off a credit card
  • What to Include in Your Net Worth
    • Rule #1: Include all liabilities
    • Rule # 2: Include Cash and Assets that Go Up in Value Over Time
  • How to Track Your Net Worth for Free
    • Google Sheets
    • Personal Capital
  • The Awesome Value of a Money-Making Net Worth Statement
  • What is a Good Net Worth
    • By Age and Income
    • Net Worth Ratios
  • Net Worth Video

I’m going to make a bold and controversial claim about net worth. Here goes. A person’s net worth is the single most important financial metric they can track. It’s more important than their income, savings rate, or monthly budget. Our net worth reflects every single financial transaction we’ve ever had. It reflects the dollar we spent on a candy bar when we were 15 and the first car we bought when we were 18.

You may have countless financial goals. You may want to get out of debt, save for child’s education, pay off student loans, buy a house, buy a car, increase your emergency fund and save for retirement. These are all important goals and worth tracking. The ultimate measure of how we handle money, however, is our net worth. All the other goals are lack stats in a a football game–rushing yards, quarterback rating, sacks. Our net worth is the score at the end of the game.

Here’s everything you need to know about net worth and how and why to track it.

What is a Net Worth Statement

A net worth statement, also called a balance sheet, is a reflection of everything that you own (assets) and everything that you owe (debts or liabilities). Your assets minus your liabilities equals your net worth. Here’s an example of a net worth statement:

net worth statement
Source: https://open.lib.umn.edu/exploringbusiness/chapter/14-3-the-financial-planning-process/

Hopefully our we have more assets than liabilities, in which case we have a net worth. For some of us that might not be the case. When I graduated from law school in 1992, my wife and I had a negative net worth of about $55,0000, thanks to student loans.

Net Worth Statement vs a Budget

Now one question we want to consider is the difference between our net worth and our monthly budget. At one one level, the difference is obvious.

A budget shows how much we make and how much we spend. You can imagine that at the top of our budget is our monthly income, and below that are our monthly expenses organized by category. And that’s, of course, very different than our net worth statement, which shows what we own and what we owe. But when we dig a little deeper, we can see two more fundamental differences.

Time Period

The first is that a budget covers a period of time. We think of our monthly budget or perhaps a yearly budget. Either way, our budget covers a period of time. In contrast, a balance sheet is a snapshot in time. For example, we update our net worth statement at the end of every year. As a result, our net worth statement is as of 12/31 of each year.

You can think of a budget as a video over a period of time, while your net worth is a snapshot.

Publicly traded companies are no different. Their annual income statement (called a Statement of Operations) shows income and expenses over the past fiscal year. In contrast, their balance sheet is as of the last day of their fiscal year.

Transactions that Affect our Net Worth and Budget

The second difference, and this is I think even more important, is that the way we earn and spend money affects our net worth and budget in different ways. Here’s the key thing to remember– every single thing we do with money, every transaction, we engage in, whether we’re buying tickets to go to the movies or we’re paying down our credit card, affects our net worth. On the other hand, not every single thing we do actually affects our budget.

Getting paid

For example, let’s imagine we get paid $2,500 after taxes on payday. How would that payment affect our financial statements? Well, the $2,500 would be added to our budget as income. It would also be added to our net worth as an asset. In that example, the transaction affected both our net worth and our budget. It also increased our net worth by $2,500.

Paying off a credit card

Recall that earlier I noted that every transaction affects your net worth, but not every transaction affects your budget (income and expenses). Let’s look at an example of that now. Let’s imagine that a week ago, we charged an Xbox series X console (if we could find one) to a credit card. After getting paid, we decide we’re going to pay it off to avoid any interest charges. How would paying our credit card off affect our financial statements?

Well, we would decrease our cash by $500. At the same time, however, we are going to decrease a liability (our credit card debt) by the same $500. This is a perfect example of a transaction that had absolutely no impact on our budget. We simply transferred $500 from one account (our checking account) to another (our credit card account).

This may seem counterintuitive. After all, we did spend $500 to buy an Xbox. These expense occurred when we charged the Xbox to our credit card. At that point the purchase would have shown up on our budget, perhaps under the entertainment category. But when we paid the credit card bill off, that transaction had no affect on our budget.

This is exactly how budgeting software such as Personal Capital works. The charge to the credit charge results in a categorized expense. Paying the card off is simply a transfer.

What to Include in Your Net Worth

What should we include in our net worth? Here I use two rules that apply to just about every situation.

Rule #1: Include all liabilities

Rule number one is that you include every single debt that you have. This would include credit cards, student loans, a mortgage, or even a personal loan that you owe to a friend or family member. Every liability gets included in your net worth statement.

Rule # 2: Include Cash and Assets that Go Up in Value Over Time

With assets, you include cash and every asset that over time you expect to go up in value. Some examples of asset to include on your net worth calculation:

  • Primary residence
  • Other real estate
  • Retirement accounts (e.g., 401(k), IRA)
  • Taxable investment accounts
  • Collectibles
  • Ownership in a business

At the same time, Rule #2 means you’re going to exclude some things that may be surprising to some. For example, I do not include our cars in our net worth statement. Yes, they have value. Yes, if we were doing a complete net worth statement for a bank loan, we would include the cars. But I don’t include them because over time they depreciate, and eventually, we go out and spend more money to buy another car.

If you do include your cars on your net worth statement, but sure to reduce the value each year based on the amount of depreciation.

We also don’t include personal property, such as clothes or furniture.

How to Track Your Net Worth for Free

We track our net worth in two ways–using a Google Sheet and using Personal Capital.

Google Sheets

Google Sheets is an easy way to track your net worth for free. It does require manual entry of asset and liability values. We update our net worth at the end of every year, and the process takes just a few minutes. By tracking our net worth in this fashion, I’m able to see the progress we’ve made going back to 2007.

If you’d like a template, check out this Excel template from Money Under 30. You can easily export it to Google Sheets if you prefer.

Excel net worth template

Personal Capital

The other thing I do is use Personal Capital. Once you connect all of your financial accounts, Personal Capital automatically tracks and updates your net worth on a daily basis. It couldn’t be any easier. And it’s free.

Personal Capital Financial Dashboard

The Awesome Value of a Money-Making Net Worth Statement

I like to look at all of our assets that are generating income or profit for me. It could be in the form of a dividend, interest, or increased market value. When viewed this way, we see a clear difference between owning shares of an S&P 500 index fund and owning a car. The car generates nothing but more expenses. The index fund generates dividends and capital gains.

Here’s where the real power of a money-making net worth statement comes into play. When you start out, all of your income comes from work. That’s all you have, if you’re like we were at of law school. We didn’t have two dimes to rub together.

As you spend less than you make and invest the rest, however, this begins to change. Over time, the income-producing assets on your balance sheet begin to compound. Fast forward a few decades (yes, this takes time), and your assets will generate more income than your day job. They call that financial freedom.

What is a Good Net Worth

People want to know where their net worth stands compared to others. While we shouldn’t focus too much on how other people are doing, it can be a motivated to do smarter things with your money.

According to the Federal Reserve, the median net worth in 2019 was $121,700. By itself, this number is not very helpful. We can, however, look at net worth by age and income.

By Age and Income

Here are the median and mean net worth by age and income according to the Fed (in thousands):

net worth by age

Net Worth Ratios

While the Fed’s data are interesting, there’s an even more useful way to think about net worth–as a ratio based on age and income. In 2010, a lawyer by the name of Charles Farrell published, Your Money Ratios: 8 Simple Tools for Financial Security at Every Stage of Life. The book walks through a ratio of how much you should have saved given your age, income and retirement goals.

As an example, if you want to retire at age 65 and live on 70% of your pre-retirement income, at age 30 you should be saving 8% of your income and have already accumulated 0.45 times your annual income. Of course, the book goes into a lot more details.

Net Worth Video

Next Up–>Check out my favorite money tools.

Filed Under: Personal Finance

8 Best Alternatives to Quicken in 2021 (#1 is Free)

January 6, 2021 by Rob Berger

Quicken was once the go-to budgeting tool. I used it when it was first released in the 1980s. Today, it’s been eclipsed by apps that enable you to manage every aspect of your finances, often for free. Here are the best Quicken alternatives to consider in 2021.

Quicken alternatives
Business report. Cup of coffee on document. Accounting.
Best Quicken Alternatives
  • Personal Capital–Editor’s Choice
  • You Need a Budget (YNAB)–Best for Budgeting
  • Tiller Money–Best Spreadsheet Budget
  • PocketSmith–Best for Calendar Budgeting
  • CountAbout–Imports from Quicken or Mint
  • Moneydance–Traditional Budgeting Software
  • EveryDollar (now Ramsey+)–Best for Dave Ramsey Fans
  • Banktivity–Designed for Macs Only

Personal Capital–Editor’s Choice

Personal Capital is the clear winner when it comes to finding a substitute for Quicken. It’s free and it offers tools to manage every aspect of your finances. With Personal Capital, you can link just about every financial account you have–checking, savings, credit cards, retirement accounts, investments accounts, HSAs, and even your home (via Zillow).

Personal Capital Cash Flow

Once linked, Personal Capital’s financial dashboard offers valuable insights into your finances. As an example, the tool enables you to–

  • Track your spending by category
  • Estimate when you can retire
  • Calculate the cost of your investments
  • Display the asset allocation of your portfolio
  • Generate a net worth statement
  • Get alerts when bills are due
  • Evaluate your investment portfolio
  • Save for emergencies

I’ve written a detailed review and guide of Personal Capital that you can check out.

Try Personal Capital

You Need a Budget (YNAB)–Best for Budgeting

YNAB is ideal for those looking just for a budgeting tool. In my view, there is no better app when it comes to creating a budget. YNAB’s interface is similar to a spreadsheet. The tool makes it easy to budget by category based on the money you actually have in the bank.

YNAB budgeting alternative to Quicken

One of YNAB’s core principles is to give every dollar a job. You do that by deciding how you’ll spend every dollar that enters your checking account. As with other tools, you can connect your bank accounts and credit cards to YNAB. This allows for real-time updates so that you can track your spending throughout the month.

YNAB doesn’t have the rich feature set offered by Personal Capital. That’s particularly clear when it comes to investing. For those who don’t want to track investments, however, YNAB is a good option.

It’s not free, however. You can try it free for 34 days. After that it costs $11.99 a month or $84 a year for the annual plan. The cost is the biggest downside to YNAB.

Tiller Money–Best Spreadsheet Budget

I don’t know how they do it, but Tiller Money has figured out how to turn a Google Sheet into a dynamic budgeting tool. You link your bank accounts and credit cards to Tiller’s Google Sheet tool, and it automatically downloads all of your transactions. From there you can create budgets, categorize spending and generate reports.

TillerMoney - Quicken Alternative

I’ve been using Tiller for the past month. It’s clear that Tiller is ideal for those who love working with spreadsheets. I will caution you that setting up Tiller can be a bit intimidating. The good news is that they have videos to walk you through each step. If I can do it, you can do it.

One thing to keep in mind is that you must manually categorize each transaction. For some, this is a show-stopper. They want the convenience of tools like Personal Capital that automate this process. For others, they would prefer to categorize transactions themselves. It forces them to look at each entry, understand how they spent money, and then properly categorize the expense.

There is no right or wrong here. It comes down to preference. You get a 30-day free trial. After that Tiller costs $79 a year.

PocketSmith–Best for Calendar Budgeting

PocketSmith started out as a calendar to plan upcoming income and expenses. Today, it’s a full-fledged budgeting app. You can synch your accounts with PocketSmith. Once synced, you can track your budget and you’re net worth. You can also see your income and spending in a handy calendar view.

PocketSmith

One stand-out feature is PocketSmith’s auto-budget tool. It can create a budget for you based on past spending. It also has a cash flow feature that maps income and spending by date range.

While there is a free version of PocketSmith, it requires manual data entry. To get automatic bank fees, you’ll need to pay at least $9.95 a month, or $7.50 a month when paid annually.

CountAbout–Imports from Quicken or Mint

If you have a lot of data in Quicken (or Mint), CountAbout may be the budgeting tool for you. It has a feature enabling you to import data from Quicken or Mint.

CountAbout Quicken alternative

CountAbout enables you to download transactions from your bank and customize both income and expense categories. You can even attach receipt images to expense transactions. You can set up recurring transactions and generate financial reports.

For the features you get, the cost is very reasonable. The basic plan costs just $9.99 a year (not a month). If you want automatic downloading of bank transactions, the cost is $39.99 a year.

Moneydance–Traditional Budgeting Software

With so many apps going online, Moneydance takes a different approach. You download Moneydance software rather than use it online. Once downloaded, the software works much like you would expect.

You can download banking transactions into the software and initiate bill pay. The software automatically categorizes expenses based on how you categorize them. In other words, it learns from your use of the program.

Moneydance Quicken alternative

It offers a dashboard (shown above) that summarizes your finances all in one place. It can also generate reports and graphs to give you a visual perspective of your money. It comes with a mobile app, can track your finances, and can alert you when bills are due.

It costs $49.99 and is available for both Mac and Windows.

EveryDollar (now Ramsey+)–Best for Dave Ramsey Fans

For those Dave Ramsey founds out there, EveryDollar may be a good substitute for Intuit’s Quicken. Now the first thing to point out is that EveryDollar ain’t cheap. After a 14-day trial, you’ll pay $129.99 a year. If you want to try it for just 3 months, it will cost $59.99. For this reason, it’s not high on my list. Still, I know that some folks are passionate about Financial Peace University.

You can sync your bank accounts with the tool, set up budgets, and track spending. The budgeting app works on both computers, smartphones and tablets. It also comes with Dave’s educational materials, enabling you to take online course and join virtual groups.

Banktivity–Designed for Macs Only

Banktivity is the budgeting app specifically designed for Macs. It offers features that enable you to organize and track all of your finances. You can group accounts and reports, and organize the dashboard in a way that works best for you.

Banktivity

Banktivity enables you to follow an envelope budget. This can be ideal for those living paycheck-to-paycheck.

You can import transactions from your bank and sync data across all of your Mac devices. Banktivity also tracks investments and offers account-level reporting. You can try Banktivity for free for 30 days. After that they offer three plans ranging in price from $4.16 to $8.33 a month (billed annually).

Whatever tool you choose, the key is to pick one that works for you. For me, that’s Personal Capital. One or more of the above Quicken alternatives, however, should suit the needs of most looking to better manage their money.

Filed Under: Investing, Tools

11 Easy Ways to Invest $1,000 for Free

December 16, 2020 by Rob Berger

It’s easier than ever to begin investing with a small amount of money. From stocks to real estate, it takes just a few minutes to create a diversified investment portfolio. The investing options have never been better. In this article, I’ll cover 11 easy ways to invest $1,000 for free.

How to invest $1,000 for free
With these investing options, no shovel is required!
Best Ways to Invest $1,000
  • How to Invest $1,000
    • 1. Pay Off High Interest Debt First
    • 2. 401(k) with Matching Contributions if Available
    • 3. High-Yield Savings Account for Short-Term Savings
    • 4. Betterment for Easy Diversification
    • 5. E*Trade Core Portfolios also for Easy Diversification
    • 6. M1 Finance for Individual Stocks
    • 7. Robinhood for Free Stock Trades
    • 8. Wealthfront for Real Estate Exposure
    • 9. Realty Income for Monthly Dividends
    • 10. Fundrise for Direct Investing in Real Estate
    • 11. Target Date Retirement Funds for Simple Retirement Investing
  • How NOT to Invest $1k
  • Invest $1k Video

How to Invest $1,000

1. Pay Off High Interest Debt First

First things first. If you have debit with double-digit interest rates, it needs to be your first priority. You won’t find a better investment than paying off any high interest debt. If you have credit card debt at double digit interest rates, that should be your top priority.

I wouldn’t worry about low interest debt, like federal student loans. I know there are financial gurus who preach you should pay off all of your debt before you start investing. They are dead wrong. if you have double digit interest rates on credit cards, however, make paying it off a top priority.

One way to deal with credit card debt is to transfer it to a 0% balance transfer credit card. That’s what I did back in the day to get out of debt. If that’s not available to you, the $1,000 should be “invested” in paying down that debt. You can check out this credit card payoff calculator to estimate how long it will take you to get out of debt.t

2. 401(k) with Matching Contributions if Available

If your employer matches contributions to a 401(k) or other workplace retirement account, this is where your first invested dollar should go. Your priority should be to contribute enough to take full advantage of those matching contributions. As I pointed out in an article on Forbes, the value of matching contributions over a lifetime can exceed $1 million. In other words, friends don’t let friends miss the match!

3. High-Yield Savings Account for Short-Term Savings

A savings account won’t make you rich, but your money is safe.

Investing is a long-term endeavor. You can’t “invest” for a day, a week, a month or even a year. They call that day-trading or swing-trading. I call it speculation. If you need money in the short term, then the best option is simply an online savings account. The rates aren’t great, but the accounts are FDIC insured, and you’re not going to lose any money.

One of my favorite options is CIT bank. It’s an online bank that pays one of the highest yields on FDIC-insured money market accounts. It has no monthly fees, you can deposit checks remotely, there is no minimum balance required, and just $100 to open an account.

4. Betterment for Easy Diversification

Betterment is one of the easiest, least expensive ways to invest in a diversified portfolio of stocks and bonds. Unlike many mutual funds, there are no minimum investment requirements to meet. You know I love Vanguard, but most of their funds have a $3,000 minimum. That doesn’t really help us when we’ve got $1,000 to invest. Betterment solves this problem.

I met the founder Jon Stein back in 2011. I’ve had accounts with betterment to try it out. It’s incredbily easy to use. You deposit money into a Betterment account, and based on your investing goals, it divides your money between stock and bond ETFs (I prefer mutual funds for most investors, but automated services such as Betterment use ETFs, which is perfectly fine).

If you’re new to investing and not quite sure how much to invest in stocks versus bonds, Betterment will help. It will walk you through a series of questions that will help you make that decision. And of course, you can change it anytime.

As always, we must consider investment fees and minimums. First, there are no minimums. Second, fees are relatively low. The cost is 25 basis points (0.25%) plus the cost of the underlying ETFs (which are cheap). , What you get in return is a very easy way to invest. I really like betterment, I think it’s a great a great option.

5. E*Trade Core Portfolios also for Easy Diversification

Another option along the same lines as betterment is E*Trade Core Portfolios. I’ve included this option because some may feel more comfortable with a traditional brokerage company. The minimum investment is $500, which works well when you have $1,000 to invest. As you can see from this screenshot, you get a well diversified portfolio of stocks and bonds (because it includes municipal bonds, or munis as they are called, this portfolio would be best suited for a taxable account).

ETrade Core Portfolios

In terms of costs, E*Trade charges 30 basis points plus the cost of the underlying ETFs. That makes it 5 basis points more expensive than Betterment. I believe in keeping expenses as low as possible, but it’s not a huge difference.

6. M1 Finance for Individual Stocks

For those who want to invest in individual stocks, M1 Finance is one of my favorite options. You can buy individual stocks without paying transaction fees. What I really like about M1 Finance, however, is that you can create what they call Pies. These are baskets of stocks, much like creating your own mutual fund. I created one that contained three bank stocks:

M1 Finance Pies
My financials Pie on M1 Finance

If I wanted to invest in this pie, I could just contribute to it. M1 Finance would then divide my contribution among these three stocks in the percentages that I set: 34% would go to Wells Fargo, 33% of JPMorgan Chase, and 33% to PNC.

Transferring money into M1 Finance and getting my money out was extremely easy. So I think this is a good option for those looking to invest in individual stocks.

7. Robinhood for Free Stock Trades

I include Robinhood in this list with some reservation. It is a free way to trade stocks, and the website and app are fun to use.

My “free” share of Macy’s from Robinhood is up!

I should warn you, however, that Robinhood does a lot in my view to encourage certain types of very risky investing. That includes buying and selling options, buying and selling cryptocurrencies, buying and selling commodities and buying on margin. I think those strategies are a good way to lose a lot of money. If you avoid those and just invest in individual stocks, Robinhood is a reasonable option.

8. Wealthfront for Real Estate Exposure

You can invest in real estate even just $1,000. Perhaps the simplest way is to invest in a REIT mutual fund. REIT stands for real estate investment trust. One potential problem is you’ve got to deal with minimum investments. So one approach is to use a service like Wealthfront.

Wealthfront Retirement Portfolio
Wealthfront Retirement includes Real Estate

Wealthfront is very similar to betterment and E*Trade Core Portfolios. I’ve used Wealthfront in the past for a SEP IRA and found it very easy to use and inexpensive. Unlike Betterment, Wealthfront includes exposure to real estate in its retirement portfolios.

9. Realty Income for Monthly Dividends

If you want even more exposure to real estate, you could invest directly in a REIT. One that I like is called Realty Income (ticker: O).

Realty Income (ticker: O)

Realty Income is best known for paying a monthly dividend for over 600 consecutive months and counting. You can also see from its portfolio that it is very diversified. One thing I’ll caution is that REITs like Realty Income should be held in a retirement account. They are not tax efficient.

10. Fundrise for Direct Investing in Real Estate

One final option for those looking to invest in real estate is Fundrise. It allows you to get as clsoe to being a landlord without actually being a landlord. The minimum investment is $1,000. The fees are on the higher side (about 1%), so keep that in mind. If we look at its historical performance, though, it’s been reasonably good over the last six years:

Fundrise real estate investment
Fundrise average annualized returns

11. Target Date Retirement Funds for Simple Retirement Investing

One last option I want to give you is what are called target date retirement funds. Most of the major mutual fund companies offer a target date retirement fund, and you’ll find these investing options in your 401(k). They’re similar to something like Betterment or Wealthfront in that you invest your money into a single mutual fund. The mutual fund then takes your money and invests it in U.S. stocks, international stocks and bonds.

They are different than robo advisors in one important respect. As you near retirement, the allocation between stocks and bonds will change. It will gradually move away from stocks and toward bonds.

Choosing a target date retirement fund is easy. Simply select the one that most closely corresponds with the year you plan to retire. Here are several options from Vanguard.

Vanguard target date retirement accounts
Vanguard target date retirement accounts

The one thing I’ll caution about target date retirement funds is that they can be on the expensive side. Vanguard’s funds cost just 15 basis points, which is very low. Others tend to be higher, so you want to keep an eye on the fees.

How NOT to Invest $1k

When it comes to investing $1,000, there are several strategies you should avoid.

The first one is what’s called day trading. Day traders seek to make money buy buying a stock, holding it for a few minutes or hours, and then selling it before the market closes. The reality is in study after study after study shows this day traders do not make money. One such study found that “it is virtually impossible for individuals to day trade for a living, contrary to what course providers claim.”

The second strategy you should avoid is buying and selling options. There are a lot of websites that try to sell options trading strategies. But again, study after study after study shows that most people lose money trading options. One study found that the “results show that most investors incur substantial losses on their option investments, which are much larger than the losses from equity trading.”

The next one, and I know this is going to be controversial, is Bitcoin and other cryptocurrencies. I know that they’re all the rage right now because prices are up. The problem is that they have no intrinsic value and are subject to wild swings. Can you find people that have made a fortune with crypto? Sure, but you can also find people that have made a fortune in the lottery. I don’t think it’s a good way to build long term wealth.

And the last way not to invest $1,000 are commodities, such as gold and silver. The historical returns have been terrible, and they are not a productive asset.

Invest $1k Video

New to investing and managing your money? Check out my book,
Retire Before Mom and Dad.


“This book is a must-have for anyone, regardless of age, to understand how to grow and protect our money over the course of our lives.” — Adrienne


Buy on Amazon

Filed Under: Investing

Mutual Funds vs ETFs–Here’s Why Mutual Funds Win

December 11, 2020 by Rob Berger

In this article, we’re going to look at the differences between exchange traded funds (ETFs) and mutual funds. In past videos (check out my YouTube channel) I’ve mentioned that for long-term buy and hold investors, I don’t see any reason that we need to bother with ETFs. That’s sparked some emails and comments from folks wanting to understand why I believe that for most investors, all you need are mutual funds.

We’re going to start by looking at mutual funds. And then we’ll turn to ETFs. And then we’ll get into the differences and why I don’t think ETFs are necessary for most of us.

Table of contents

  • Mutual Funds
    • Actively Managed vs Passively Managed (Index) Funds
    • How Mutual Funds are Bought and Sold
  • Exchange-traded Funds
  • ETFs vs Mutual Funds
  • Why Mutual Funds are Better than ETFs for Long-term Investors
  • VFIAX vs VOO
  • When an ETF may be a Better than a Mutual Fund
  • ETFs vs Mutual Funds Video

Mutual Funds

So I want to begin by looking at the Vanguard 500 index fund (VFIAX). Here’s a snapshot of the fund from Morningstar (it’s one of my favorite investing tools).

Vanguard 500 Index Fund (VFIAX)

Morningstar User’s Guide

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This is an example of a mutual fund. To better understand mutual funds let’s look at the problem they were designed to solve. Before mutual funds, if you wanted a diversified portfolio you had to research companies and governments and then buy enough stocks and bonds to create a diversified portfolio. It was very time consuming and expensive. You could hire a broker, which many people did, which just added to the cost.

Mutual funds made it easier and less expensive for investors to create a diversified portfolio. Rather than having to go out and research all these companies, you can just invest in a few mutual funds and get instant diversification. Your money is divided up among hundreds, if not thousands of stocks and bonds at a relatively low cost.

Actively Managed vs Passively Managed (Index) Funds

There are two types of mutual funds–actively managed and passively managed.

An actively managed fund is one where the management of the fund picks specific stocks or bonds based on fundamental or technical analysis. A passively managed fund, also called an index fund, simply tracks an index such as the S&P 500.

How Mutual Funds are Bought and Sold

There are two important thing to understand about mutual funds. First, shares of a mutual fund are bought and sold directly with the mutual fund company. If you want to invest in a mutual fund, like our Vanguard 500 fund above, you buy directly from Vanguard. Vanguard issues you shares of the fund and invests your money in the underlying assets of the mutual fund.

In contrast, when you buy a share of stock, the transaction is with another investor. This distinction is going to become important when we get to ETFs.

Second, with a mutual fund, you always pay what’s called the Net Asset Value (NAV). The NAV represents the value of the stocks and bonds the fund owns. NAV is reported on a per share basis. You can see in the above screenshot that the NAV for the Vanguard fund was $342.68.

Unlike a stock price that fluctuates throughout the trading day, a mutual fund’s NAV is adjusted just once after the market closes. When you buy or sell shares of a mutual fund, the price you pay or receive is determined after the market closes. That means, as a practical matter, that when we submit an order to buy or sell shares of a mutual fund, we won’t know the price until after the market closes. The price, however, will always be the NAV–no more, no less.

Exchange-traded Funds

Let’s turn to exchange traded funds or ETFs. This screen shot is of the Vanguard S&P 500 ETF (ticker: VOO) taken from Morningstar.

Vanguard S&P 500 ETF (VOO)

It is virtually identical to the mutual fund above in several respects.

Just like a mutual fund, it provides a low cost way to achieve easy diversification. This Vanguard ETF, just like the mutual fund, invests in 500 of the largest US companies. ETFs are also inexpensive, just like index funds.

There are, however, some significant differences. The best way to understand these differences is to understand why ETS exist in the first place. If they’re so similar to index mutual funds, why in the world do we have them? The answer is that some investors want the ability to trade a mutual fund in ways similar to trading a stock. An ETF enables them to do that. An ETF is like taking a mutual fund, but giving it the ability to trade like a stock.

So what does that actually mean? Well, the first thing is that just like buying or selling a stock, the price of the Vanguard S&P 500 ETF, or any ETF for that matter, fluctuates throughout the day when the market is open. That’s why, in the above screenshot of VOO, you see the Day Range, Opening Price and so on. You also see a bid/ask spread, just like you would for an individual stock.

As a result, an investor can short an ETF just like shorting a stock. You can also buy and sell options on an ETF. That’s not possible with a mutual fund. It also allows you to sell or buy the ETF at the price that exists during the trading day. So if I want to buy VOO right now, you can see the bid/ask I could buy it at. I know what price I’m going to get at least within a couple of pennies. If I buy the mutual fund, I’ll pay the NAV as calculated after the close of the market.

ETFs vs Mutual Funds

ETFsMutual Funds
Low CostYesYes, for index funds
DiversificationYesYes
Trades at NAVNoYes
Trades like a stockYesNo
Options tradingYesNo
Required minimum investmentNoSometimes
Automated monthly investmentsNoYes

Why Mutual Funds are Better than ETFs for Long-term Investors

At first glance ETFs may seem like the better deal. You get all the benefits of a mutual fund, along with some extra trading features of a stock. Not so fast.

First, long-term buy and hold investors don’t need the features ETFs offer. We have no need to short a stock or an ETF. We have no reason to buy or sell call or put options on an ETf.

Second, buying ETFs adds complexity because of the bid/ask spread. In the case of VOO, the bid/ask spread is not significant–Just a few pennies. For other ETFs, it can be much wider . The result is that we would pay more than NAV when we buy and receive less than NAV when we sell. There’s simply no good reason for long-term investors to take this haircut.

Finally, if you want to set up monthly contributions, mutual funds are the answer. You can automate contributions or withdrawals to or from an ETF.

VFIAX vs VOO

To underscore why EFTs are not necessary, let’s compare VFIAX and VOO. Their portfolios are identical. Since they both track the S&P 500, it makes sense that they would hold the same investments. For example, they both have 99.04% in U.S. equities. The both have a P/E ratio of 19.59. The price to book is 33.17 and the price to sales 2.31% for both.

Now, if we look at the expense ratios we see a small difference. The mutual fund is four basis points (0.04%), while the ETF is three basis points (0.03%). So I suppose one could say why not go with the least expensive option, even if it is just one basis point.

There are two reasons. First, you still have to deal with the bid/ask spread, it’s not significant, but it will add costs as you buy and sell above and below the NAV.

Second, we need to look at each fund’s performance on an after-fee basis. A comparison of performance from Morningstar shows that the mutual fund more often than not actually outperforms the ETF. It’s not by much, just a few basis points most years. But it’s enough to erase the one basis point difference in expenses.

When an ETF may be a Better than a Mutual Fund

I will concede that there are a few times when it may make sense for long-term, buy and hold investor to consider an ETF. The first reason deals with the required minimum initial investment of mutual funds. VFIAX above has a minimum investment of $3,000. In the case of the ETF, there is no minimum investment. This could be a hurdle for some. In my view, one should save up the $3,000 and then invest. Alternatively, there are other S&P 500 index funds that have no minimum investment, such as those offered by Fidelity.

Second, you could want exposure to certain very unique asset classes where ETFs are the better option. A friend of mine likes to invest in country-specific ETFs rather than developed and emerging market funds. For the vast majority of investors, however, this is not necessary.

If you have already built a portfolio of ETFs, I’m not suggesting you should exchange them for mutual funds or that you’ve made a mistake. As we’ve seen from the Vanguard funds, they are virtually identical in terms of fees and portfolio. Certainly, there’s no reason to make any changes if it’s going to trigger tax liability in a taxable account. But for those that are just beginning or thinking about this question, I think for most buy and hold long-term investors, mutual funds are our ideal.

ETFs vs Mutual Funds Video

Filed Under: Blogging

How the 4% Rule Works

December 7, 2020 by Rob Berger

The 4% rule is a rule of thumb that can help you figure out how much money you can spend each year in retirement without going broke. If you’re many years away from retirement, you can also use it to figure out just how much money you’ll need to actually retire. This article is the first of a series exploring the 4% rule, how to apply, its limitations, and alternatives to retirement spending methodologies.

Table of contents

  • My Experience with the 4% Rule
  • How the 4% Rule Works
    • Step 1: Add up your retirement savings
    • Step 2: Multiply your retirement savings by 4%
    • Step 3: Beginning in year 2 of retirement, adjust the prior year’s spending by the rate of inflation
  • Where did the 4% Rule Come From?
  • How to use the 4% Rule for Retirement Planning
    • Step 1: Estimate your yearly expenses in retirement
    • Step 2: Determine amount of yearly expenses covered by retirement savings
    • Step 3: Multiply results from step 2 by 25
  • How the 4% Rule can Lead to Bizarre Results
  • How the 4% Rule Works–Video

My Experience with the 4% Rule

The 4% rule hit home for me two years ago at the age of 51. I had just sold my business, an online media company that owned a number of finance blogs. And I retired. Yes, I’m part of the FIRE (Financial Independence, Retire Early) crowd.

At the time, I did all the calculations using the 4% rule on a very conservative basis. My wife and I had more than enough to retire. But actually doing it is a lot different than thinking and writing about it. After I sold the business, I was scared to spend the money. In fact, I was so scared, I took a full time job.

I know that doesn’t make a whole lot of sense. But that’s what I did. Now, in fairness, I worked at Forbes and enjoyed it immensely. It was lifestyle friendly. However much I enjoyed the work, it doesn’t change the fact that I built a business, sold it, and retired at the age of 51, only to go back to work out of fear of running out of money.

Now, the good news is it forced me to really take a deep dive into the 4% rule. I’ve read dozens of papers on the 4% rule. I have read books, I’ve studied dynamic spending plans, things called guardrails.

I’ve even looked at how institutional investors like the Yale endowment figure out how much money they can spend each year from the endowment without running out of money. There are a lot of parallels between how an endowment functions on the one hand, and how you and I should think about spending in retirement on the other.

What I learned from studying the 4% rule is that it’s a really good rule of thumb. It still works today. Second, almost no one should actually follow it in retirement. I know those seem to contradict each other, but they don’t, and I’ll explain why as we go along in this series.

In this article we’re going to look at four things. First, we cover a high level view of what the 4% rule is and how it works. Second, we’re going to look at who created the 4% rule. Third, we’ll cover how to use the 4% rule to estimate how much you need to save to retire. Finally, we’re going to look at some very bizarre results that can flow from actually following the 4% rule. So let’s get started.

How the 4% Rule Works

The 4% rule is simple to apply in retirement. It takes just 3 steps.

Step 1: Add up your retirement savings

The first step in using the 4% rule is to add up all of the money you’ve saved for retirement. This can include both retirement accounts as well as taxable accounts you expect to use to fund expenses in retirement. For example, you would include any money in a 401k or other workplace retirement plan, any IRAs that you have, and any money in taxable investing accounts, or savings accounts, certificates of deposit, or checking accounts.

Include anything you’ve saved, that’s going to be used to fund your retirement. Typical accounts include the following:

  • 401(k)
  • 403(b)
  • 457
  • TSP
  • IRA
  • Roth IRA
  • HSA (if used for retirement)
  • Taxable investment accounts
  • Savings accounts
  • Certificates of deposit

There are a few things you don’t include. You don’t include social security, annuity income or pension payments. You’re only factoring in money you’ve saved and accumulated for retirement. If you use a tool like Personal Capital to track your investments, this step is easy.

That’s step one. Let’s imagine that you’ve saved $1 million just to use a round number to make the math a little easier.

Step 2: Multiply your retirement savings by 4%

The second step is to multiply the results from step 1 by 4%. With $1 million, 4% would be $40,000. That’s the amount of money using the 4% rule that you could spend in the first year of retirement.

Step 3: Beginning in year 2 of retirement, adjust the prior year’s spending by the rate of inflation

It’s the second year that trips some folks up. The way you calculate all the years in retirement after year one is different. Beginning in year two, you do not use 4%. Instead, you take the amount of money you were able to spend the prior year and adjust it for inflation.

So in our hypothetical we spent $40,000 in year one of retirement. Let’s assume inflation is 2%. In year two, we could spend $40,800. To calculate this number, we simply add 2% to the amount we were able to spend in the previous year. Two percent of $40,000 is $800. Added to our first year spending brings us to $40,800. The following year we’ll increase $40,800 by the rate of inflation (or decrease it by the rate of deflation).

The 4% rule and the bucket strategy can lead to
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Where did the 4% Rule Come From?

The 4% rule dates back to 1994. It comes from an article published in the Journal of Financial Planning by William Bengen, a certified financial planner. He is the father of the 4% rule. The article–Determining Withdrawal Rates Using Historical Data.

Bengen’s primary focus wasn’t actually the 4% rule as we know it today. In fact, that term doesn’t appear in his paper. What he was more concerned with was how you go about calculating how much a retiree can safely withdraw each year from retirement accounts.

At that time, a lot of advisors would use average market returns and average inflation rates to determine the initial withdrawal rate. For example, they might explain to a client that a typical portfolio consisting of 60% stocks and 40% bonds has returned about 8% over the last 100 years. At the same time, inflation has averaged about 3% a year. Based on these averages, financial advisors would tell clients that they could withdraw 5% (8% average return – 3% average inflation) the first year of retirement, and then adjust that by the average rate of inflation. 3%

Bengen’s concern was that actual stock market returns and actual inflation rates might not support an initial 5% withdrawal rate. Even if the averages proved to be accurate over a 30-year retirement, really bad markets and high inflation in the early years of retirement could cause a retiree to run out of money before retirement ended.

And that’s in fact exactly what Bengen’s paper concluded. If you wanted to be completely safe, the most you could take in your one of retirement was 4%.

Now, we will look at the methodology behind the 4% rule and the assumptions he used in later articles. Both are extremely important to understanding how we can and cannot, and how we should and should not, apply the 4% rule.

How to use the 4% Rule for Retirement Planning

You can use the 4% rule to estimate how much you’ll need to save before you can retire.

Step 1: Estimate your yearly expenses in retirement

The first step is to estimate your yearly expenses in retirement. If you are near retirement, your current budget may suffice. Just remember to make adjustments if necessary to account for the transition from work (e.g., commuting costs go down, but retirement hobby or travel expenses may go up). If you are many years from retirement, taking a percentage of your current income (say 80%) may be sufficient for a rough estimate.

Step 2: Determine amount of yearly expenses covered by retirement savings

Next, estimate how much of your yearly expenses will be covered by retirement savings. For most people, social security and perhaps a part-time job will cover some portion of expenses in retirement. You can get an estimate of your social security benefits directly from the Social Security Administration.

Others may have a pension, an annuity or both. Subtract these other sources of income from your estimated yearly expenses. What is left is what must be covered by retirement savings.

Step 3: Multiply results from step 2 by 25

Multiply the results from Step 2 by 25. Note that this is the inverse of the 4% rule. If your expenses covered by retirement savings total $40,000 a year, multiplying this number by 25 gives us $1 million. Taking 4% of $1 million brings us back to $40,000.

How the 4% Rule can Lead to Bizarre Results

Now let’s underscore some of the difficulties with the 4% rule and why we need to be so careful with it.

Let’s imagine two couples are thinking about retiring. They’re good friends, and so the four of them go to a financial advisor together. The financial advisor explains the 4% rule–they can spend 4% of their portfolio in the first year of retirement and then adjusted for inflation every year thereafter.

One couple, we’ll call them the Retired Couple, decides to retire. They have a million dollar portfolio. They take out $40,000 in the first year, which leaves them with $960,000.

The second couple, will call them the Working Couple, decide to hold off for a year. They’re not going to add to their retirement portfolio, but plan to use the next year to pay off some debt before they retire. So they just leave the $1 million in their portfolio.

Now, let’s imagine that over the next year the market doesn’t do so well. Both portfolios fall by a total of 20%. So where do we stand after the first year?

  • Retired Couple: $1 million – $40,000 spending = $960,000 – 20% = $768,000
  • Working Couple: $1 million – $0 = $1 million – 20% = $800,000

Now let’s imagine the four of them go back to the advisor to find out how much they can spend in year two.

For the Retired Couple, they don’t look at their balance to determine how much they can spend in year two. Recall under the 4% rule that beginning in the second year, you simply take whatever you spent the previous year and adjust it for inflation. So if we assume a rate of inflation of 2%, the Retired Couple could spend $40,800 ($40,000 + ($40,000 * .02)).

In year two, the Working Couple who are now retiring for the first time, however, have to take whatever their balance is and multiply it by our familiar 4% number. Since they’re down to $800,000, 4% is $32,000.

Now if you think these results seem a little bit odd, it’s because they are. Our Retired Couple has a portfolio that’s lower than the Working Couple. They’re down to $768,000 compared to $800,000 for the Working Couple. Yet they can take out over $8,000 more–$40,800–compared to just $32,000 for the Working Couple. That seems like a pretty bizarre result to me.

Portfolio BalanceSpending AllowedCalculation Method
Retired Couple$768,000$40,800$40,000 + 2% inflation
Working Couple$800,000$32,000$800,000 * 4%

Now, what do we do with this? Does this mean the 4% rule is invalid? Does it mean it contradicts itself? Is it difficult to apply? Well, not exactly.

It does underscore the difference between theory and reality. And in fact, we’re going to cover a lot of realistic scenarios in this article series where the 4% rule, while it’s a good planning tool, and it’s a good rule of thumb, may not make a lot of sense when you go to actually apply it.

The good news is, I’ve got a number of alternatives that I’ll share with you that I think can be just as effective, but maybe a bit more practical to apply. So in the next article, we’re going to look at Bengen’s methodology–how he actually went about calculating what we now know is the 4% rule. Once we understand that we can begin to apply this information in a practical way to both retirement planning and retirement spending.

How the 4% Rule Works–Video

Filed Under: Retirement Tagged With: 4% Rule

How to Take Smart Notes Review

November 7, 2020 by Rob Berger

How to Take Smart Notes

Title: How to Take Smart Notes

Author: Sönke Ahrens

Published: 2017

Date Read: 2020

Amazon Rating: 4.4 out of 5

My Rating: 4.2 out of 5

Buy From Amazon


Summary: Writing is the key to learning, and it begins not with a blank page, but with writing down our ideas and then linking them to other ideas to create a latticework of knowledge and understanding.

Who Should Read this Book

  • Anybody interest in Zettelkastens (Slip Box note taking)
  • Knowledge learners who want to remember what they learn
  • Avid readers who want to take notes about what they read
  • Students (middle school or above)
  • Writers who hate staring at a blank page

What I Liked About How to Take Smart Notes

  • It does a great job of explaining the awesome power of the Zettelkasten.
  • It’s a good mix of theory and practice.
  • It explains the inherent limitations folders and tags and why linking at the note level is so powerful.

What Could Have Been Better

  • The book would have benefited from more concrete examples of actual notes, but the substance of the notes and how he links them to other notes.

My Notes

Key Quotes

The brackets and tags (#) you see represent links I created from each block in Roam Research, the note-taking tool I use.

“One cannot think without writing.” [[Niklas Luhmann]], p. front matter #Thinking #Writing

“…those who take smart notes will never have the problem of a blank screen again.” p. 2 #[[Smart Notes]] #[[Writer’s Block]]

“the myth of the blank page. . . good, productive writing is based on good note-taking.” #Writing [[Writer’s Block]]

“The research on will power or ‘[[Ego Depletion]]’ is in a bit of turmoil at the moment. But it is safe to say that using willpower is a terrible strategy to get things done in the long run.” p. 4 n.2 [[Ego Depletion]], [[willpower]] https://replicationindex.com/2016/04/18/is-replicability-report-ego-depletionreplicability-report-of-165-ego-depletion-articles/

“We know today that self-control and self-discipline have much more to do with our environment than with ourselves and the environment can change.” p. 5 #self-control #self-discipline

“Every task that is interesting, meaningful and well-defined will be done, because there is no conflict between long- and short-term interests.” p. 5

“Having a meaningful and well-defined task beats willpower every time.” p. 5 #[[willpower]]

“Having a clear structure to work in is completely different from making plans about something. If you make a plan, you impose a structure on yourself. p. 6 #planning #[[structure workflow]]

“The challenge is to structure one’s workflow in a way that insight and new ideas can become the driving forces that push us forward. We do not want to make ourselves dependent on a plan that is threatened by the unexpected, like a new idea, discovery – or insight.” p. 6 #workflow

“[T]hose who are not very good at something tend to be overly confident, while those who have made an effort tend to underestimate their abilities.” p. 8 #[[Dunning-Kruger Effect]] #[[Imposter Syndrome]]

“Most people try to reduce complexity by separating what they have into smaller stocks, piles or separate folders. They sort their notes by topics and sub-topics, which makes it look less complex, but quickly becomes very complicated.” p. 9. #Complexity #simplicity

“The simplicity of the structure allows complexity to build up where we want it: on the content level.” p. 9 #[[011 Zettelkasten]], [[Smart Notes]], [[note-taking]].

“The importance of an overarching workflow is the great insight of David Allen’s ‘Getting Things Done’.” p. 10 #[[overarching workflow]], #workflow

“Everybody is motivated when the finish line is within reach.” p. 21. #motivation

“Notes on paper, or on a computer screen . . . do not make contemporary physics or other kinds of intellectual endeavor easier, they make it possible.” [[Neil Levy]], p. 23. #notes #[[note-taking]]

“Putting notes into the slip-box, however, is like investing and reaping the rewards of {{alias: [[Compounding]] compound interest}}.” p. 93.

Key Ideas

The #[[Imposter Syndrome]], a feeling that one is not up to the task, is often a sign that you are. Kind of the opposition of the [[Dunning-Kruger Effect]].

Taking notes badly doesn’t create an immediate [[Negative Feedback]], which is why it’s so prevalent. How do we create negative feedback in all areas of our lives?

Negative Feedback is crucial to [[100 Excellence]], [[Habit Formation]] and more.

It’s why losing weight is so difficult, the negative feedback of eating poorly is not immediate. It’s also why most people don’t jump from tall heights—the negative feedback is almost instantaneous.

Breaking large projects into discrete tasks such that each task can be completed in “one go” creates a structure that enables [[flow]]. p. 6

What creates flow? How does our environment and [[task structure]] help create or maintain flow?

It’s better to be an [[expert]] than a [[planner]]. p. 7

The best at anything struggle the most, experience [[self-doubt]]. See [[Dunning-Kruger Effect]]

The mediocre at something often are the most confident. #confidence

Keep it simple. #simplicity

How do you write in outer space? NASA faced this problem because pens don’t write without gravity to push the ink to the tip. So NASA spent millions of dollars and countless hours to invent a pen that would write in space. The ingenious device uses compressed nitrogen to push the ink toward the tip of the pen. Russia faced the same dilemma. It used a pencil.

Zettelkasten Method

Step 1: Record bibliographic information of content consumed (e.g., books, articles, podcasts, videos)

Step 2: Record own ideas about the content from Step 1 in separate [[notes]]. Notes are written with great care, such that they could be used in a final manuscript. Very concise.

Step 3: Link the note(s) created in Step 2 to other related notes in the [[011 Zettelkasten]]

Step 4: Connect notes to an index. [[Structure Zettel]]

Types of Notes

[[Fleeting Notes]]: Capture every idea that comes to mind. They go in your #inbox to be processed later.

[[Literature Notes]]: Take notes on what you read. Keep it short, selective and in your own words. Be very selective with quotes.

[[Permanent Notes]]: Once a day review [[Fleeting Notes]] and [[Literature Notes]] and think about how they related to your current interests and research. The idea is not to collect–see [[Collector’s Fallacy]]. The point is to develop critical ideas, arguments and facts. Look for revealing questions and unique relationships.

  • One idea per note
  • Write as if the note will be published
  • When done, delete Fleeting Notes

Permanent notes should be written in way that allows you to understand them even when you have forgotten the context in which they were originally written.

[[Project Notes]]: Notes related to a specific project, just as writing a book or paper.

Linking Notes

Add the permanent note to your system through linking:

  • Add links to an index note. [[folgezettel]]
  • Add direct links to other Permanent Notes
  • Add links to previous/next notes

[[Smart Notes]] focus recording one thing–“insight that can be published”

[[Smart Notes]] in a [[011 Zettelkasten]], like [[Compounding]] becomes more valuable as it grows.

Quotes:: “The slip-box is designed to present you with ideas you have already forgotten, allowing your brain to focus on thinking instead of remembering.” p. 41.

Common Mistakes

Treating every [[idea]] as important. It results in nothing being important.

Taking only [[Project Ideas]].

Taking only [[Fleeting Notes]]

Consistent format of notes is critical. #[[metadata]]. A standard format eliminates decision-making.

Let the Work Carry You Forward (p. 51-56)

The process of taking [[Smart Notes]] creates a [[workflow]] with [[Feedback Loops]] that is self-sustaining. It’s a circular process, as we read, take notes, read, take more notes and add to or modify existing notes. The interconnectedness of our ideas help us to remember them. An isolated idea, like a plant separated from the soil, will soon die. A idea connect to other ideas with grow and flourish.

  • Separate and interlocking Tasks
  • Multitasking doesn’t work
  • Focus on one task at a time. Separating different tasks helps us to stay focused on one task at a time. [[workflow]], not just motivation, is critical to staying focused. The [[011 Zettelkasten]] provides the workflow.
  • We should write down the results of our thinking
  • Reduce decision-making in the process of note-taking.
    • Same note format
    • Same process for Literature Notes
    • Same process for extracting and connecting ideas
  • Read for Understanding

Literature Notes should be prepared with the goal of creating Permanent Notes in mind. [[Begin with the end in mind]]. Some Literature Notes will be extensive, depending on the complexity of the source and our knowledge of the subject. Some Literature Notes may be nothing more than a single sentence. The key to remember is that Literature Notes are there to aid in the creating of Permanent Notes.

Keep an open mind. Challenge your theories. Be curious.

Writing is not the process of taking our thoughts and ideas and putting them on paper. Writing is the process of coming up with the thoughts and ideas in the first place. Thinking is not an internal process divorced from the physical world. It happens with pen in hand or fingers on the keyboard. p. 95

In the case of a [[011 Zettelkasten]], the “external Scaffolding” as described by Neil Levy, 2011, Neuroethics and the Extended Mind, includes not just the notes, but also the links between the notes. And the links are not just a convenience or a pathway. If done properly, the compel us to ask, “how does this idea related to other ideas in my collection.” And it’s this question that makes all the difference. Indeed, it’s the thoughtful linking that turns a collection of notes into [[Smart Notes]] and a [[Second Brain]].

But how do we do this? We ask good questions:

Q: Why is the idea/book/article important for my own lines of thought?

Q: What does this all mean for my own research and the questions I think about in my slip-box?

Q: Why did the aspects of the book I recorded in my Literature Note catch my interest?

Q: What does it mean?

Q: Hoe does it connect to other ideas?

Q: What is the difference between . . .?

Q: What is it similar to?

We also write down how ideas connect with each other, which in turn forces us to understand how ideas relate to one another and how they differ…

Develop Ideas

While Ahrens recommends adding links to each note to an index, he rightly points out that links between notes are more important. With an index, we organize our ideas based on our current understanding. With links, we give our future self an opportunity to discover what is currently unknown.

“Focusing exclusively on the index would basically mean that we always know upfront what we are looking for – we would have to have a fully developed plan in our heads. ^^But liberating our brains from the task of organizing the notes is the main reason we use the slip-box in the first place.^^” p. 109 #Quotes #[[011 Zettelkasten]]

The index is a means to an end. It should be designed to give us “entry points” into our slip-box. From there we allow the interconnected notes to take us on a journey of exploration and surprise.

“The quicker we get from the index to the concrete notes, the quicker we move our attention from mentally preconceived ideas towards the fact-rich level of interconnected content, where we can conduct fact-based dialogue with the slip-box.” p. 109 #Quotes #[[011 Zettelkasten]]

Think like a writer, not an archivist. An archivist asks where to store a note based on keywords (tags or folders). A writer asks, under what circumstances do I want to stumble upon this note in the future, long after I’ve forgotten about it.

Good tags, or keywords as Ahrens calls them, are words and phrases not already used in the note.

Converting Literature Notes into Permanent Notes is a process of [[abstraction]] and re-specification. We take a specific idea and generalize it. Then we narrow back down to the specific, but in a different context. For example, I took the idea of a [[Latticework of Models]] and abstracted it to the broader idea of the [[Power of Patterns]]. From there I re-specified it in the field of [[510 Chess]].

“Making things more complicated than they are can be a way to avoid the underlying complexity of simple ideas.” #Quotes #[[000 Learning]] #Complexity

Keep notes concise and standardized.

A literature note can be as simple as “on page x, she says y.”

Standardization makes the technical side of note-taking automatic.

Share Your Insight

[[Brainstorming]] is not an ideal way to generate [[Writing]] topics. We favor recent ideas and hold onto our first ideas, even if they aren’t the best.

[[Writer’s Block]] is generally a problem for those who see writing as a task separate and apart from research and note-taking.

We can instead use our slip-box as the source of our ideas for articles, papers and books (and [[Podcast]]s)

How to Take Smart Notes

Rob Berger

Rating

Summary

A must-read for students, knowledge works, writers, and others pursuing a life-long journey of learning.

4

Filed Under: Book Reviews

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This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.