Money is an emotional topic. We tend to use money as proxies for self-worth and self esteem. We think of money as control and power. Self worth, self esteem, control and power are all things we strive for as we grow up. Our sense of adulthood is threatened when we communicate about money. Consequently, we are very susceptible to the shyster who can tap into and exploit those vulnerabilites.

The key to mastering those vulnerabilities is to gain a perspective on what money is.. Money is a tool. Money's function is to store buying power against future need and to relieve anxiety. The function of money is not to cause anxiety.

Little bits of wisdom I have stumbled upon in learning about money.

*You can live like a millionaire or become a millionaire. It is almost impossible to do both at the same time.

*Money conforms to The three laws of thermodynamics. They are:

You cannot win.

You cannot break even.

You have to play the game.

*You cannot win. I knew a guy who would look at the winners and losers for the day. He was sure that he could foretell which would be which, if only he knew enough. He judged his performance against the biggest gainer for the day, typically +20%. It is a fool's game to compare your performance to the luckiest of the lucky. It causes needless anxiety. Remember, the function of money is to reduce, not cause anxiety.

*You cannot break even. Commissions eat you alive. You could match every transaction of the hottest money manager and not match his/her performance. You will pay higher commissions. Your transactions will be executed after their transactions. Brokers take care of their big paychecks. And you cannot compete unless your name is Bill Gates.

*You have to play the game. Even with all the flaws, there is no better game in town. If you accept the first two laws, then you start looking for the vehicle that will deliver the most bang to your account. I have my money in Vanguard Total Market Index fund. It is expense and tax efficient. It always has a piece of the hottest action regardless of which sector is hot. Basically, you own a piece of the US economy.

*Another result of thermodynamics is that you look for basic rules that are easy to execute. Exotic schemes can fail in many exotic fashions. Here are a few that have withstood the test of time:

*Come to grips to what you need to live (utility) and what you want to live (luxury and fashion). Be conscious in your choices. You will have no money to set aside if you live within your means. You must live below your means. You win this game by looking at your co-workers and having an older car, a smaller house and by eating at home more often than they do.

*Armor your investments by having an emergency fund of 2-to-6 months of living expenses. The smart way to handle this is to pay your 10% savings into the emergency fund and then cascade half the money into an investment when you have built it up to the six month level.

*Dollar cost averaging. Contribute a constant dollar amount every time period. The old rule of thumb was to give 10% to your favorite charity (tithing) and pay 10% to yourself. Those are still good rules. Buying a set dollar amount results in your purchasing more shares when prices are low and buying relatively fewer shares when prices are high. The effect is particularly dramatic when you are buying extremely volitile investments.

*Diversify. Diversification does not mean buying 10 slightly different shades of green crayons. Too often investers own 10 different mutual funds that have 80% overlap in core portfolio. Buying a single good index fund will give you more diversification than buying 10 growth oriented funds. Tom Kaminski told me that the best rule of thumb is to own your age in bonds (or bond funds) and the remainder in stocks. So a 40 year old would have a portfolio of 40% bonds and 60% a good (i.e., low expense ratio) index fund.

*Your house is a lousy investment. This is contrary to popular wisdom. Bear two things in mind. Real estate brokers are the ones who tout the "houses as investment" mantra the most. Do you reckon they have a vested interest? The other issue is that any plan that sets aside assets in a regular way is better than no plan. That would be true even if the money lost buying power. Morgage payments are the only discipline most people can adher to.

*Your job/profession is a great investment.

*Keep your vehicle as long as getting it repaired does not distract you from your job/profession.

*Remember the rule of 72. 72 divided by the rate of return is the number of years required to double your investment.

*Have realistic expectations. This is tough because the last 10 years have been very kind to the stock market, and the stock market wealth has spilled over into other sectors. Adjusted for inflation, the stock market averaged about 8.5% over the last 70 years. That means the dollar you invest when you are 30 will buy $26 worth of goods when you are seventy. Adjusted for inflation, bonds averaged about 5.0% That means that the dollar you invest when you are 30 will be buy $7 worth of goods when you are 70.

*Never give away 1% return. There are two ways you give away money. One way is to be naive about taxes. A 20% tax rate turns the $26 you would have made in the stock market to $14, and the $7 in bonds to $4.80. The other way you give away money is in high expenses. Using high expense mutual funds (usually the ones that advertise the most) take the $14 to $10.28 and the $4.80 to $3.52. Hmmmm!

*Don't be surprised if the market goes down. Since the Roman times, business owners expected a venture to pay for itself in ten years. Ten years was a significant portion of a human's life prior to 1900. Life expectencies have increased since 1900, so 15 years is probably a comparable period of time. By way of a reality check, the Price/Earnings ratio historically bungie cords around 15. As of January 2001, it is about 25. Regression-to-the-mean and fundemental cynicism regarding lasting changes in human nature both suggest that the stock market will come down.