PDF Summary:How to Adult, by Jake Cousineau

Managing your finances can feel overwhelming, especially when you're just starting out as an adult. In How to Adult, Jake Cousineau breaks down the fundamentals of personal finance, from understanding how compound interest works to creating a budget that fits your lifestyle. He explains core concepts like credit scores, taxes, and the difference between price and value—knowledge that will help you make better financial decisions throughout your life.

Cousineau also explores how to apply these financial principles to major life decisions, including whether to rent or buy a home, how to evaluate the cost of college, and why investing your money is crucial for building wealth. This guide provides practical advice for navigating the financial challenges of adulthood and setting yourself up for long-term financial success.

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Applying Financial Principles to Life Decisions

Next, Cousineau urges you to consider the financial implications of your decisions about education. College is expensive, and you should take every possible step to minimize the expense. Picking the priciest institution can lead to financial trouble, so you should balance what you'll earn in the future with the school's cost.

(Shortform note: Some scholars disagree with Cousineau’s view that you should make decisions about where to study based on financial considerations. In Not for Profit, philosopher Martha C. Nussbaum argues that education should never be viewed primarily as a way of increasing a nation’s economic growth, but as a process of cultivating critical thinking, empathy, and the capacities for democratic citizenship that enable people to live together with justice and mutual respect.)

Next, we’ll discuss ongoing financial management, growing your resources, protecting your monetary well-being, and considerations for significant purchases.

Ongoing Financial Management

Growing Financial Resources

Cousineau asserts that putting money into investments is a key strategy for growing wealth. This means allocating your finances or assets toward a vehicle with the aim of gaining additional wealth or assets. Investing lets you build your wealth more swiftly and effectively. If you opt out of investing, you're likely to deposit your funds into a bank savings account instead. Although your funds will be secure, they will grow very little. The average U.S. savings account offers 0.06% interest, so a $1,000 deposit would earn you $6 in one year. By comparison, the typical gain for the S&P 500 has been roughly 8% since 1957, so if you put that $1,000 into the market, you'd typically earn $80 annually.

(Shortform note: The math here is off: 0.06% of $1,000 is $0.60, not $6. This is because 0.06% as a decimal is 0.0006, not 0.06. To calculate the interest earned, multiply the principal amount by the interest rate as a decimal. For example, $1,000 x 0.0006 = $0.60. This highlights how little money you can earn from a savings account with such a low interest rate.)

Protecting Financial Wellbeing

Cousineau also advises against opting into protection against overdrawing to prevent unnecessary fees. Overdraft coverage is a feature that permits purchases to go through despite insufficient funds in your bank. However, it costs approximately $30 whenever you overdraft, which can devastate your budget. If it’s not urgent, it's preferable for your transaction to be denied rather than incur the fees.

(Shortform note: While overdraft fees can be costly, Campbell et al. argue that opting into protection against overdrawing can be beneficial in certain situations. For example, if you have an automatic payment set up for your rent or utilities, having the transaction denied could result in additional fees from the merchant or even the cancellation of essential services. In these cases, the overdraft fee may be a smaller price to pay compared to the potential consequences of a missed payment.)

Major Purchase Considerations

Cousineau urges you to assess what something is worth when making a purchase, rather than just looking at the cost. The price represents the item's cost in dollars. The value is the benefit the purchase will give you, along with what else you could use that money for. If you only focus on the price, you might become cheap, always seeking the lowest amount. This might not always be beneficial to you. Instead, be economical, aiming to maximize the benefit of each purchase.

(Shortform note: In microeconomics, the concept of “utility” is used to describe the value of a product or service. Utility is the satisfaction or benefit you get from a purchase. This is a subjective measure, as different people will get different levels of satisfaction from the same purchase. Economists use this concept to explain why people make the choices they do. For example, if you buy a $5 coffee, it’s because you value the coffee more than the $5.)

He also emphasizes being prepared for the monetary impact of major acquisitions like a vehicle or a home. A major budgeting error people make is overspending on housing and transportation. It often takes years to pay off these purchases, so if you buy a car or home that you can't afford, it could ruin your finances for many years or even decades. Before committing to these major acquisitions, it's vital to assess if you're prepared, anticipate what to expect, and consider how this choice will affect your financial situation.

(Shortform note: Major purchases like a vehicle or a home can be hazardous to your finances because they require you to make large monthly payments. If your income drops or your expenses increase, you may not be able to adjust your budget to accommodate these changes. This can lead to a cycle of missed payments, late fees, and additional borrowing that can damage your finances for years to come.)

Next, we’ll discuss durable goods and real estate, followed by education and human capital investment.

Durable Goods & Real Estate

Cousineau urges you to consider the advantages and disadvantages of renting versus purchasing a house. Purchasing a house is the costliest thing you'll ever buy, so it's essential to know how it works and assess if it's financially wise for you. For many people, it might be more practical to rent. Nevertheless, there are compelling arguments for purchasing a house. Purchasing a house lets you increase your ownership stake with every payment. Equity represents the portion of your house that's paid off, after deducting the remaining debt.

(Shortform note: In Rich Dad Poor Dad, Robert T. Kiyosaki argues that purchasing a house to build equity is a poor financial strategy. He contends that your home is not an asset if it takes money out of your pocket every month; it is a liability, and the path to becoming rich is to acquire real assets that put cash into your pocket instead of pouring your money into a larger, more expensive home that does not generate income. He explains that renting can be a smarter financial move if you invest the money you save into income-producing assets.)

You can sell your house down the road, and since real estate often gains value, you can typically sell it for more than your purchase price. Homeownership comes with tax benefits, as you can write off various expenses, including mortgage interest and property taxes. Yet, downsides exist to homeownership. Moving or traveling extensively becomes more difficult. It requires a significant amount of initial money, and monthly costs are greater. You must also address any problems. However, renting makes it easier to move or take trips. You'll need significantly less cash initially, and your monthly costs will be lower. The landlord must handle any problems. However, rent keeps going up, while your mortgage interest is fixed. Renting doesn’t help you build equity, it doesn’t offer tax advantages, and it limits your freedom.

Adjustable-Rate Mortgages

This is only true if you have a fixed-rate mortgage. Many home loans have adjustable interest rates, which can change over time. According to a Wikipedia article, adjustable-rate mortgages (ARMs) are home loans with interest rates that can change over time. They usually start with a lower fixed rate for a set period, like five years, and then the rate adjusts periodically based on a financial index. This means your monthly payments can go up or down depending on market conditions. ARMs can be risky because if interest rates rise, your payments could become unaffordable. However, they might be a good option if you plan to sell or refinance before the adjustable period begins. It's important to understand the terms of an ARM, including how often the rate can change and how high it can go, before deciding if it's right for you.

Cousineau also advises making sure you’re financially ready before purchasing a house. You’re not financially ready to buy a home if you owe a significant amount of money, you lack the funds for a down payment of at least 10-20%, your monthly payment will exceed 30% of your monthly take-home income, you haven’t established a reserve fund, or you plan to reside in the house for fewer than five years.

(Shortform note: Cousineau’s advice on homebuying readiness is geared toward people who are buying a single-family home to live in. If you’re considering buying a small multi-unit property and renting out the other unit(s) while you live in one, the 10-20% down payment and 30% monthly payment rules may not apply. In The House Hacking Strategy, Craig Curelop explains that the most important number is your net housing cost after you factor in the rent from the other units.)

Education & Human Capital Investment

Cousineau sees education as an investment in human capital. Despite college being expensive, it's still a wise use of money. In 2019, college graduates had an average annual salary of $78,000, compared to $45,000 for those who only completed high school. Higher earnings will offset the expense of college over time.

(Shortform note: Economist Gary S. Becker is widely credited with developing the modern concept of human capital in his 1964 book Human Capital. Becker argued that investments in education, training, and health are analogous to investments in physical capital like machines or buildings. He showed that education increases a worker's productivity and earnings potential, making it a form of capital embodied in people.)