Jonathan Clements's Blog, page 179

Wiser in 21 Ways

WHEN I MET ARON for dinner, the occasion marked a milestone for both of us. Aron had earned his bachelor���s degree in audio production in 2020���during the thick of the pandemic���and finding his place in the industry had been more difficult than he���d hoped.

Now that things were finally falling into place, Aron approached me for help with his finances. In particular, he wanted to understand his tax situation, which had grown into a mixture of self-employed contract work and part-time employment.

I���ve known Aron since my wife Sarah began babysitting for the family when she and I were dating in college. Aron���s parents took in Sarah and me as part of the family. They���re our treasured friends and mentors.

We���ve watched Aron and his two siblings grow up. To have him ask for financial advice meant a lot. I felt thankful for our enduring friendship���and a little bit old���but mostly thankful.

In the few hours we spent together, I covered as much ground as possible���in between bites and catching up, of course. Later, I asked Aron if he would mind if I summarized our discussion for HumbleDollar��readers. He gave me the green light. Here are the 21 items we discussed���10 about taxes and 11 about investing. We started with taxes:

1. Big Picture. Both your self-employment income and your wages end up in the same place on your tax return���the taxable income line. Know the No. 1 tax return equation: taxable income x tax rate = total tax. Then No. 2: total tax - tax credits and previous payments = taxes owed or refunded.

2. One Schedule C. Even if you���re doing projects for several clients, think of your consulting work as one business. When you file your tax return, total up all of your business income and deductions on a single Schedule C.

3. Business deductions. These aren���t about being clever. Rather, you just have to keep organized records. Does the purchase have a business purpose? If so, you can probably deduct it.

4. Writeoffs. If you can deduct a business expense, it���s effectively a discount. That doesn���t mean it���s free. The discount percentage typically equals your marginal tax rate���anywhere from 10% to 37%, depending on your taxable income. Don���t spend money just because you get a discount. Instead, spend if it helps your business.

5. Tax brackets. This is how you know the tax rate that applies to your next dollar of income. You can look up your tax bracket here��if you know your filing status���such as single or married filing jointly���and your amount of taxable income. The higher your income, the greater your tax rate.

6. Self-employment tax. This is the Social Security and Medicare tax. When you���re an employee, your employer foots half the bill and your half is withheld from your paycheck before you ever see it. But if you���re your own employer, it���s your responsibility to set aside the cash to pay both halves. At least the 15.3% tax is assessed not on every dollar you earn but on your net self-employment income after deductions. And you do get to deduct the employer half of the self-employment taxes that you pay.

7. Extra payments. When you earn wages as an employee, you make tax payments through withholding from every paycheck. When you���re self-employed, you make quarterly payments to cover both income tax and self-employment tax. The due dates are April 15, June 15, Oct. 15, and Jan. 15 of the next year. My suggestion: Go old school and mail a check along with an estimated��tax voucher. Be sure to use certified mail so you can prove you sent it on time. The IRS���s website offers electronic payment options, but you might incur extra fees or frustrating issues���like a planned outage on a payment due date.

8. Underpayment penalty. You���ll avoid this unnecessary cost if you send timely payments covering at least 90% of what your total tax turns out to be���or 100% of the prior year's total tax figure. Make that 110% if you���re a high-income earner. The penalty is a 6% annual rate of the amount you owe, compounded daily until you pay the shortfall. If you find yourself behind, increase the withholding on your paycheck from fulltime or part-time employment. It���s a magic way to make a fourth-quarter payment count as if it had been paid one-fourth in each quarter.

9. IRS tax calculator. If you think you need to make estimated tax payments, how do you know how much to pay? Hiring a tax professional would help, but otherwise try the IRS���s Tax Withholding��Estimator. Answer its detailed questions and it���ll do the calculation for you. Just remember, the output's accuracy depends on the input's accuracy. The calculator is designed to tell you how much tax to have withheld from your pay by an employer, but the results are detailed enough to use to determine your estimated tax payments, too.

10. Separate business bank account. Open one and run all business-related deposits, withdrawals, income and expenses through it. For the sake of record keeping and good business governance, don���t mix personal and business transactions.

At this point, our conversation turned to investing.

11. Red flags. When you come across someone who claims to have exclusive insights that���ll bring investing windfalls, don���t listen. Take your money lessons from a teacher who���s thoughtful, objective, thorough and humble.

12. Risk. It���s impossible to avoid risk when investing. Instead of always seeking to minimize risk, aim to manage it wisely.

13. Volatility. Markets will go up and down���sometimes sharply. Don���t let that surprise or discourage you. When markets are down, you get to invest at clearance sale prices. Keep investing when markets are up, too���because you won���t know when ���up��� and ���down��� happened except in hindsight.



14. Types of assets. There are essentially three: cash, bonds and stocks. Yes, there are alternatives, but you should keep most of your money in these three, and perhaps all of it. Cash���think checking and savings accounts, savings bonds and certificates of deposit���is most likely to preserve value but won���t earn much return. Stocks pose the greatest risk of quickly losing value but also have the best potential for high long-run performance. Bonds are in the middle.

15. Diversification. Manage market volatility by spreading your investments among both stocks and bonds, and by owning large numbers of securities within these two categories. When one asset class goes down, the other should be going up���or at least going down less.

16. Funds. Rather than buying individual stocks and bonds, buy shares of a mutual fund or exchange-traded fund that holds a portfolio of them. This is the simplest and most effective way to eliminate the risk that a single bad stock or bond could cause you big losses.

17. Investment philosophies. There are essentially two: active and passive. You could buy an actively managed fund that attempts to use knowledge and intuition to outdo the market���s average return. You���ll win some, you���ll lose some, but this way will always be more expensive. Alternatively, you could buy a passively managed index fund that aims to earn the market average while incurring lower costs.

18. Time horizon. Ask yourself this question before every investment decision: How long will it be until I withdraw my money? If you���ll need part of your money within five years, keep it in cash.

19. Long-term investing. A long time horizon is an investor���s best friend. When you have it, you don���t need to care about the market���s short-term volatility, so give your money its best chance to grow by favoring stocks. Remember, if you don���t at least outpace inflation, you���re losing ground. Long-term investors can also earn compounded returns. Check out the math; it���ll inspire you.

20. Types of accounts. Before you choose what investment fund to buy, you���ll need to choose which type of account to use. At the highest level, there are two choices: a regular investment account which is taxed every year, or a retirement account���like a 401(k) or IRA���which gives you tax benefits but where you typically need to keep the money invested until age 59��.

21. Long-term investment tax rates. Even if you hold investments in a regular taxable account, you���ll get a special low tax rate not only on qualified dividend income, but also on long-term capital gains���provided you own the investments for at least a year and a day. This tax rate can even be 0% if your taxable income is low enough. It���s another reward for taking a long-term approach to investing.

After sharing so much with Aron, I wanted to recommend one action that he could take as soon as we parted ways. My suggestion: Open a Roth IRA and start investing regularly. Getting started by making investing a habit and giving your money time to compound���those are slam dunks.

I later visited Aron, and he gave me a tour of his audio production studio. He���d assembled an impressive collection of cool equipment. Even cooler: He told me about how he had documented his spending to take business tax deductions���and about his new Roth IRA.

Matt Christopher White is a CPA and CFP�� who writes about money and apprenticeship to Jesus. He's the author of ���How to Love Money: Four Paradoxes that Breathe Life into Your Finances,��� available at MattChristopherWhite.com . Matt is equally comfortable talking about Luke 6:43, Section 643 of the Internal Revenue Code and the 6-4-3 double play. There���s no place he���d rather be than with Sarah and their two girls, Lydia and Eliza, at their home in the foothills of the Smoky Mountains. Follow Matt on Twitter @WriteMattWhite and check out his earlier articles .

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1,000 Days at a Time

THREE YEARS AGO, I wrote an article suggesting I had 7,000 days to go, at least according to the Social Security Administration���s life expectancy��calculator. The 1,000 days since then represented a significant 14% share of my remaining actuarial life.

The good news is, the Social Security calculator now estimates that my life expectancy is about 6,400 days. I���ve enjoyed 1,000 days of life but only used up 600 days of life expectancy. That���s like a 40% return on life over the past three years. Unfortunately, this math is doomed to the law of diminishing returns. Like fellow HumbleDollar scribe Dick Quinn, I���m counting down the days.

So, what happened over those last 1,000 days? Lots.

Our daughter got married, our son graduated from college and bought his first home, and we moved to be nearer to both children. We lost several close family members and the best hiking dog ever. I added a few creaks to my aging body and soul. Retired life is mostly good, and going as anticipated.

We purposefully sampled several new-to-us life experiences, many of them pandemic-era additions to our bucket list. We went deep-sea fishing twice, tried fly fishing once, and took up wake-boarding and wake-foiling with varying success. We rented five different mountain cabins for a total of seven weeks, chartered a catamaran in remote islands, rented a lake camp for two weeks, and hiked in 10 more national parks. Per the modern senior mandate, we also sampled pickleball.

These fresh adventures were all outdoors, often in isolation, usually inexpensive and always undertaken with family or close friends. All were enjoyable, though I learned that fly fishing is not my gig.

The outside world has seemed stressful, what with COVID-19, the Ukraine war and far too much polarization. But except for COVID, such issues didn���t directly affect my daily life. Still, today���s constant and unhealthy barrage of negative news is tough to ignore, no matter what the media source. Avoidance is the only remedy.

Financially, it���s been a rollercoaster ride. Our wealth is still modestly ahead of where it stood 1,000 days ago, even after accounting for COVID, a major��house purchase, three years��� expenses and the recent stock market decline. After the raging bull market���followed by the current bear market���stock values have mean-reverted until they aren't far off their historical averages.

My takeaways from the last 1,000 days suggest that I focus on five objectives over the next 1,000 days:

Do it now, because our days are numbered.
Make the most of family connections as family is forever. Give 'em a hug at every opportunity.
Head outdoors because nature nurtures us, plus there are no media outlets there.
Avoid obsessing over things beyond our control. The perfect answer will almost always elude us. As an obsessive engineer, this is the objective I find most challenging.
Stay healthy, as everything else hinges on it.

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Breakfast for a Buck

LIKE EVERYONE ELSE, I���ve been experiencing sticker shock lately when I step into the grocery store.

Meats, vegetables, paper products, canned goods���everything is costing a lot more. One example: My favorite brand of Good���s thin pretzels now costs $2.50 a bag���75 cents more than I was paying a year ago. Compared to the other brands in the snack aisle, those Good���s pretzels are still a bargain, but it sure doesn���t feel that way.

Along with steeper prices for gas, utilities and other necessities, higher food costs are making it hard for retirees and semi-retired folks like me to stick to a budget. The good news is that core food prices��dropped��for the sixth straight month in September, but it will take some time for those lower costs to show up on supermarket shelves.

In the meantime, this value-seeking frugalist is doing everything he can to stretch his food dollars while still eating healthily. And those choices start with breakfast.

These days, Rachael and I do most of our grocery shopping at the local Aldi. We figure we save 30% to 40% on groceries by shopping at Aldi rather than the chain supermarkets, and the quality of the food is every bit as good or better. I also find Aldi���s stores to be less overwhelming than big-box supermarkets like Costco, albeit without the yummy handouts. Just remember to bring a quarter for a shopping cart���which you���ll get back when you return the cart.

My day always starts with coffee, and so does my shopping list. With even mass-market brands like Seattle���s Best and Dunkin��� now going for $7 to $8 a package, we���ve been picking up Aldi store-brand Barissimo dark roast ground coffee for about $5 for a 12-ounce package. It���s not Starbucks, but it���s darn good coffee and certainly a lot better value. We get about 16 cups of coffee from each package, so my two morning cups of coffee cost roughly 60 cents.

As for the main meal, we eat a lot of oatmeal. Yeah, I know���porridge is boring. But cooked with an apple and cinnamon, and topped with a touch of brown sugar, walnuts and blueberries, that bowl of oatmeal is not only tasty, but also packs a nutritional punch. Think whole-grain carbs, soluble fiber, protein and other juicy goodness.

In fact, oatmeal is one of the most nutrition-dense meals you can eat. It���s good for the heart, lowers blood sugar and bad cholesterol, and promotes healthy bacteria in the gut, helping to keep that digestive machine running like a clock.

We avoid instant packaged oatmeal with all those artificial flavors and additives, preferring instead the real stuff that comes in a box and requires cooking. Our favorite brand is Aldi���s Millville store brand of steel-cut oats. An 850-gram box of Millville oats costs $3 for 6�� cups of milled oats. At a quarter cup of oats per serving, each box yields a whopping 27 bowls of oatmeal.

That means each bowl of healthy oatmeal I���m eating in the morning costs about a dime. Throw in the cost of the other ingredients and that figure goes up to maybe a quarter.��Which means that overall, including my two cups of coffee, I���m spending less than a buck for a healthy breakfast. Now, that���s value.

Some may say that, in my quest for value, I���m missing out by not stopping at Starbucks or Dunkin��� in the morning and spending $12 for a fresh-brewed cup of coffee and an egg-and-cheese sandwich.

I would beg to differ. I grew up eating oatmeal and consider it to be one of life���s simple pleasures. Our mother used to make a big pot of Quaker oatmeal for us six kids to chow down for breakfast before heading off to school. After setting the piping hot oatmeal in front of us, she would circle the table with a paring knife, cutting slices of banana into our bowls. That hot oatmeal sure felt good in the stomach as we waited to board the bus while blowing steam into the frosty morning air.

These days, whenever I smell oatmeal cooking in the pot in the morning, I think of my mother stirring that pot of goodness on the stove. I think of warmth and home and abundance. I think of all the ways our parents provided for us, despite not having two nickels to rub together. We didn���t go on fancy vacations, didn���t eat at fancy restaurants, but we always had enough, and it was because of things like oatmeal that stretched the dollar.

As I describe in my book��The Long Walk Home, memories of those cozy mornings in the old kitchen eating oatmeal with my siblings helped bring me out of a dark period years later, when I was going through a grueling divorce. It���s the simple things, I firmly believe, that not only provide the greatest value in life, but also leave the best memories. Who remembers going to Starbucks?

Breakfast is the most important meal of the day. For me, I get a healthy one for less than a buck. Now, if only I could cut down on those snacks.

James Kerr led global communications, public relations and social media for a number of Fortune 500 technology firms before leaving the corporate world to pursue his passion for writing and storytelling. His debut book, ���The Long Walk Home: How I Lost My Job as a Corporate Remora Fish and Rediscovered My Life���s Purpose,��� was published in 2022 by Blydyn Square Books. Jim blogs at PeaceableMan.com. Follow him on Twitter @JamesBKerr and check out his previous articles.

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Worst Year Ever

BONDS ARE ON PACE to have their worst year on record. To be sure, once interest rates stop rising���perhaps early next year���they may win back their place as a worthwhile investment for retired investors. But right now, that feels like wishful thinking.

As the Federal Reserve has hastily raised short-term interest rates in big steps to fight inflation, bond prices have fallen down the cellar stairs. Bloomberg���s broad U.S. aggregate bond index is down 16%��in 2022. It���s the worst year for U.S. bonds since reliable recordkeeping began in 1926.

Bond prices fall when interest rates rise because bonds issued earlier���which pay lower rates���get discounted until their return equals the currently available yield on new bonds. No less an authority than Vanguard Group declared the six months through June 2022 the worst��half-year for bonds ���since either before the Civil War or George Washington was president.��� If you���re wondering, the Civil War began in 1861 and Washington���s second term as president ended in 1797.

Bonds are supposed to provide a counterweight to stocks and act as a stabilizing force during bear markets. That hasn���t happened this year. Nothing���s worked.

Now for the better news: Bonds could rise from the ashes and make a valuable contribution once again to a retiree���s portfolio. The 10-year Treasury note yielded more than��4.2% in late October, its highest rate in 15 years, though that remains below the current U.S. annual inflation rate of 8.2%.

Still, higher bond yields could signal the end of TINA���the mantra that there's no alternative to stocks. Since 2010, many investors who wanted income turned to dividend-paying stocks because bond yields were hovering near zero. Now, the yields on super-safe Treasurys can compete with utility stocks and easily outpace the dividend yield on most other shares. The S&P 500���s dividend yield is currently��1.7%.

I was taught there were three main asset classes: stocks, bonds and cash. The one to avoid when investing for retirement was cash because its returns were too scant. I broke this commandment when I retired in 2020. I sold bonds and stocked up on cash���not rustling paper cash, but certificates of deposit and other investments that promised stability of principal.

At the time, the 10-year Treasury yielded less than 1%, so I wasn���t missing out on income. Interest rates would have to rise someday, I reasoned, so bonds had nowhere to go but down. In the meantime, most of my cash accounts���which also yielded only 1% or 2%���were at least insured against loss by the Federal Deposit Insurance Corporation.

But now my cash is losing lots of ground to inflation. ���Inflation will likely linger at an abnormal level for at least another season, which will keep the markets on edge,��� Vanguard concluded in its third-quarter bond analysis.

What to do? At some point, I should switch from cash back to investment-grade bonds, but perhaps not just yet. The Federal Reserve is expected to continue raising short-term interest rates for a while longer, and that could send bond prices down again. There���s talk that the Fed will slow its campaign of interest rate increases next year, at which point bonds may stabilize.

At that juncture, bonds could win back their place in retirees��� portfolios. We could bank on bonds��� predictable stream of income, plus bond prices are historically less volatile than stocks. More income with less risk sounds promising.

What if inflation stays stubbornly high? That could dampen bonds��� comeback. Still, it���s worth remembering that investments often perform their best after they���ve been through hell���and when they���re most despised by investors.

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When I Get Stupid

COPING WITH FINANCIAL complexity as we age can lead to major problems���and denial isn���t the solution. What to do? One HumbleDollar commenter, in response to a recent article, recommended a book, What to Do When I Get Stupid, by economist Lewis Mandell.

The book has two main themes. First, we should try to create a guaranteed stream of income, preferably one that���s linked to inflation, to cover our core retirement expenses. This could be a combination of Social Security, pension income, inflation-indexed Treasurys, annuities and possibly a reverse mortgage.

Second, we should make our finances as ���stupid-proof��� as possible to prevent disastrous investing or spending mistakes that could derail our retirement. Mandell presents evidence that, on average, our capability to make financial decisions involving credit peaks at age 53. Our decision-making ability with investments peaks later, at age 70.

It seems that, as we age, we gain experience, knowledge and wisdom. But this is somewhat offset by a decrease in our fluid intelligence, which is the ability to think abstractly and deal with complex information. Fluid intelligence decreases with age, just as vision and hearing do. The rate of decline is specific to the individual but tends to steepen after 70. We would all do well to consider the possibility of cognitive decline.

Mandell gives several specific recommendations for handling these concerns. In addition to the two already covered, here are four suggestions that stood out for me:

Insulate your core expenses from inflation. Having a home that���s both paid off and set up for aging in place shields you from housing inflation. It may also prevent the need for an expensive retirement community or nursing home.
If you have limited income and assets outside of the equity in your home, consider a reverse mortgage.
Have your estate documents in place and identify a trusted representative to handle your affairs if you need assistance.
Decide if you���ll use a professional to manage your money. If you choose to do it yourself, simplify your finances.

I���m sure many HumbleDollar readers have helped older friends or family members manage their finances in their later years. Helping my mother-in-law and my wife���s Aunt Pat was a memorable and fulfilling experience for me. It forced me to ratchet up my knowledge of financial planning, eventually leading me to complete the Certified Financial Planner and Retirement Income Certified Professional programs.

Both women were quite competent money managers through most of their lives. They lived within their means, saved regularly, invested carefully and organized their finances to an amazing degree. Sadly, in their early 80s, cognitive decline robbed them of their interest in managing their affairs and their ability to do so.

One early warning sign was the growing stack of unopened Vanguard Group statements at my mother-in-law���s house. She had been one of the most organized people I knew. The fact that she didn���t immediately open, check and file her statements was a red flag.

A few years ago, as part of my AARP TaxAide volunteer service, I prepared the tax return of a retired teacher. She had a large number of 1099-INT statements. None of them was particularly large, most well under $100. When I asked why she had so many, she explained that one of her retirement activities was researching yields on certificates of deposit. When she found one she liked, she would drive to that bank���s closest branch and open a new account. She did this all over southeast Pennsylvania.

She was well organized, so preparing her return was time-consuming but not technically difficult. Still, I worry that, as she ages, the complexity of all those certificates of deposit may become more than she can handle. More important, she said she didn���t have anyone to take over her finances if she became incapacitated.

Many of us want to simplify our financial life in retirement. Chasing higher yields may be financially rewarding, but it comes at the expense of increased complexity. We all have to decide how we want to balance the tradeoff between simplicity and return. It���s important to think about this early, and honestly, and then decide what makes sense for your situation.

Perhaps, if you need help, you have someone in your life with the skill and inclination to manage a complex financial situation. But you should also consider whether this is a responsibility you want someone else to assume���or whether you should simplify now, while you still have the mental wherewithal to do so.

Richard Connor is��a semi-retired aerospace engineer with a keen interest in finance. He��enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter��@RConnor609��and check out his earlier articles.

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Still Too Warm

I'M 34 GOING ON 74. Like an old man set in his ways, I routinely prepare my own meals and rarely go out to eat. But last week, I shook things up by scarfing down some ribs at a nearby outdoor mall. I couldn���t help but notice all of the ���now hiring��� signs.

It���s a far cry from when I ventured to the same mall in March and April 2020. Do you remember that feeling���the uncertainty and anxiety about what life was going to look like amid the height of the pandemic? I recall walking around feeling like I was on a different planet. Storefronts were shuttered. Few souls were in view on what was usually a busy Friday evening.

Fast forward two-and-a-half years. Last week, we received fresh snapshots showing how tight the labor market is���at least aside from the tech sector. Tuesday featured a surprising jump in the number of job openings from 10.3 million at the end of August to 10.7 million in September, according to the Job Openings and Labor Turnover Survey (JOLTS). Economists expected just 9.8 million vacant positions. That���s an indication of not enough labor supply, which further pressures the Federal Reserve to keep up its aggressive rate-hiking. Short-term interest rates spiked when the strong JOLTS report hit the tape.

Soft employment readings then came from two broad economic activity reports. The ISM Manufacturing and ISM Services Employment subindexes revealed a mixed picture. The manufacturing sector���s job market was stronger than forecast, while the services sector showed modest labor market contraction last month.

Finally, the big October jobs report was released Friday morning. The 261,000 jobs created were above analysts��� expectations, but the unemployment rate ticked up. Overall, I���d call it a ���warm��� report���not quite as hot as some other big monthly job gains we���ve seen lately.

Unfortunately for employees, average hourly earnings climbed just 4.7% from a year ago, well below the current 8.2% headline Consumer Price Index (CPI) inflation rate. On Thursday���after the midterms���the October CPI report will cross the wires. The consensus forecast calls for a slight downtick to an 8% 12-month increase.

How did financial markets react to last week���s news? U.S. stocks fell, as did the bond market. But foreign shares had their best week relative to the U.S. market since 2008. My hunch: After the midterm elections and October's inflation report have passed, uncertainty among investors will subside���and with it market volatility.

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Walking the Highwire

I DON'T ENVY THE FOLKS��in Washington. Last year, many accused Federal Reserve policymakers of being asleep at the wheel as they downplayed the risk of rising inflation. This year, of course, it���s been the opposite: The Fed has been in overdrive, raising interest rates aggressively. So far, the Fed has pushed through��six increases in a row, totaling 3.75 percentage points. Many are now criticizing the Fed for moving too quickly.

This is in contrast to the challenge the Fed had been dealing with before COVID. For most of the past decade, it had been contending with a different problem entirely���inflation that was��too low.

Read each of the Fed���s��press releases, and you���ll see how policymakers think about inflation: ���The Committee is strongly committed to returning inflation to its 2 percent objective.��� It���s hard to believe today, but between 2009 and 2020, raising inflation��up��to that 2% mark was the challenge. Over that period, inflation averaged��just 1.5%.

A popular online meme depicts the challenge the Fed is facing: A fellow puts a pot on the stove, turns on the heat and begins to cook his dinner. Everything seems fine. But within seconds, flames shoot up, and the man runs for safety. It���s funny, but it illustrates the box that Fed officials find themselves in: The central bank wants��some��inflation but not��too��much. It���s a tricky balance.

Given the risks posed by inflation���including��the risk��that it can flare up so quickly���many have asked why the Fed would want any inflation at all. Instead of its 2% target, why wouldn���t the Fed simply target zero? In simple terms, why should milk, eggs or anything else necessarily cost more each year?

There are two main explanations. First, a little bit of inflation helps keep the economy moving forward. This is easiest to understand if we look at the risk posed by��deflation���that is, when prices are falling. Suppose you���re a consumer looking to make a major purchase���a new car, for example. In a deflationary environment, you could expect the price of that car to be lower in the future than it is today, so the incentive would be to delay that purchase. If you could hold off and get a better deal, you���d be rewarded for waiting.

That���s the dynamic that takes hold when there���s deflation. When consumers expect prices to fall from year to year, they���ll tend to postpone purchases. If enough people do this, economic growth can stagnate. Policymakers live in fear of this. Some feel that deflation is even worse than inflation.

That explains why deflation is a bad thing, but it still doesn���t��explain why��some��inflation��is��necessary? Why wouldn���t the Fed simply target a zero-inflation rate, which would be neither inflationary nor deflationary?

In theory, a zero-inflation target might work, but it turns out that a little bit of inflation is still better than none. If consumers know that prices will generally be trending upward over time, that���ll nudge them toward making purchases today rather than tomorrow, when prices might be a little higher.

Another way in which a little bit of inflation helps the economy keep moving: When consumers have an expectation that their wages will rise over time, that makes them more willing to take on debt, enabling them to make��major purchases.

Consider a young couple buying their first home. For a lot of people, it���s a financial stretch to make that first purchase. There���s the expression, in fact, that the first mortgage payment is the hardest. But people still take that leap of faith, because they have confidence their incomes will rise over time. For many people, mortgage payments feel slightly overwhelming at first. After several years, though, the payments feel manageable. And by the end���after many years of wage increases���the payments seem almost negligible.

If, however, home buyers had no expectation that their wages would rise over time, they���d be a lot more cautious. Imagine taking on an obligation that would feel slightly overwhelming not just in the beginning but for the entire 30-year period. Very few people would sign up for that. But because people expect their incomes to grow over time, they���re happy to take that risk. The Fed knows this, and that���s a key reason it targets an inflation rate that���s modestly above zero.

Beyond the benefits for the broad economy, there���s a second, more subtle reason the Fed prefers some inflation. Because interest rates and inflation are connected, the Fed always wants a little bit of inflation so it can maintain interest rates that are���ideally���in the low single-digits. That���s important because it gives the Fed the flexibility to drop rates when it needs to. When the economy goes into recession, that���s one of the Fed���s key policy levers to help reignite growth.

If rates are already low, however, that lever becomes much less effective. This problem isn���t just theoretical. One of the criticisms of former Fed Chair Alan Greenspan was that he left rates too low for too long after the 2001 recession. In fact, years after the recession ended, Greenspan���s Fed continued to lower rates. By mid-2004, the Fed had dropped rates to levels not seen since the 1960s.

While the Fed did finally begin to raise rates in 2004, they were still quite low when the next crisis rolled around in 2008. When the economy went off a cliff that year, the Fed faced a problem: With rates already low, Fed officials had little room to maneuver. As a result, they were forced to use the Tommy gun of monetary policy, known as quantitative easing (QE). When you hear about the Fed ���printing money,��� that���s what QE is all about.

The Fed employed QE in 2008 and again in 2020 because, in both cases, rates were already at very low levels. There���s no question that QE is effective, but it���s also a strategy of last resort���used when the Fed has no remaining room to drop rates. QE isn���t great because it���s risky. Dropping new dollars into the economy can exacerbate inflation, as we���ve experienced this year.

In reality, there���s an even more extreme policy option: The Fed could follow the lead of Western Europe���s central banks and push rates down below zero. In that case, the Fed could maintain an inflation target even lower than its current 2%. But negative rates open up another Pandora���s box. Among other problems, it means that savers are punished for saving. When you ���earn��� a negative interest rate, you actually have to pay the bank to hold your money, rather than the other way around. Because the consequences of this unusual policy are hard to predict, the Fed has so far stayed away from it.

The upshot: The Fed���s first choice during recessions is to employ the most traditional form of monetary policy���lowering interest rates���and thus that���s��the second��reason the Fed continues to walk a tightrope between an inflation rate that���s too high and one that���s too low.

Adam M. Grossman��is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on Twitter @AdamMGrossman��and check out his earlier articles.

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TINA Is Dead

OVER THE PAST FEW weeks, my wife and I did something we hadn���t done in four years: We bought bonds.

Specifically, we parked some money in one- to two-year Treasurys paying 4.3% to 4.6%���the highest rates in 15 years. Our portfolio now approaches 5% bonds, and we plan to buy more. We���re waiting to capture higher rates following the expected Federal Reserve rate increases.

Bonds represent a seismic shift for us. In early 2020, I even wrote that the 60% stock-40% bond portfolio seemed dead, thanks to near-zero interest rates. But today, bonds are back, and it���s TINA (there is no alternative to stocks) that now appears dead.

We recognize that our bonds are losing to inflation in the short term. Still, as retirees, we may be hurt less by inflation because many of our costs are either fixed or in decline, including housing, transportation and education. Also, inflation should eventually come down.

In 2021, I also wrote about our use of covered calls on high-dividend stocks as a sort of bond proxy. In today���s bear market, this approach has held up well because the stocks involved haven���t been crushed like technology stocks. In fact, some of these ���value��� stocks remain near all-time highs, despite the market downturn.

Our bond-proxy approach resulted in our portfolio regularly having a stock allocation of more than 90% through much of the 2021 TINA era. This year, we thought it prudent to reduce our stock exposure due to a mix of personal and market changes.

We bought a second home in January. This required some stock sales, plus we now need to maintain a larger stash of operating and emergency cash. We have also ramped up our vacation spending after a two-year pandemic hiatus. On top of that, inflation provides another reason for a larger cash cushion, as we strive to make sure we have enough money on hand to cover our expenditures.

Concurrent with our house purchase, interest rates started to rise after 21 months of being near zero���ever since the March 2020 pandemic start. In early 2022, the Federal Reserve began ramping up interest rates, Russia invaded Ukraine and inflation was rampant. These developments have all boosted the odds of a recession.

As a result, we lowered our portfolio���s stock exposure by some 13 percentage points, so it���s now closer to 80%. Unlike HumbleDollar���s editor, we got there by selling long-term stock holdings on the way down rather than buying in hopes of a rebound. I rationalize this ���investment sin��� as a lock-in-less gains, limit losses, rebalance and risk-reduction measure. Maybe we should have done more.

In the big picture, our small allocation shift from stocks to bonds and cash doesn���t change much, other than to make my wife and me feel slightly more comfortable about our risk exposure. Each 10% move away from stocks probably only impacts near-term wealth by a couple percent in either direction���depending on good news or bad on issues such as inflation, Ukraine, corporate earnings and interest rates.

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Can’t Compare

COMPARISONS ARE the death knell of happiness���and they aren���t good for our wallets, either.

If we���re to get the most out of our time and money, we need to devote those two precious resources to things we consider meaningful. But how do we figure out whether something is indeed meaningful to us, and not a reflection of the influence of others?

For ���meaningful,��� dictionaries offer synonyms such as ���important��� and ���significant.��� What we���re talking about are things that have some special emotional resonance, and that���ll be different for each of us. But it strikes me that there are perhaps three dimensions.

First, it might be something we���re passionate about���church, a favorite charity, a political cause, our work. Second, it would include things we especially enjoy���travel, theatre, cooking, sports, clothes, hobbies. Third, it would encompass friends and family���the social fabric that ties our life together.

What resonates for you? Part of the answer is no doubt obvious. You likely care for your family to a degree that���s hard to put into words. You either think your work is meaningful or you don���t. You have charities you donate to year after year.

But often, we end up lavishing time and money on things we later realize aren���t important to us. Partly, that���s because our interests change over time. But it���s also because we realize things we thought we valued were actually things that reflect the influence of others.

We might have adopted our parents��� political beliefs, only to shed them later in life. We may have been drawn to a particular vacation spot by seductive advertising, only to discover it wasn���t all that special. We might have aped the lifestyle of those we admired or felt competitive with, only to realize it wasn���t the way we wanted to live.

I think this last error���mimicking celebrities, keeping up with the Joneses, showing off to the neighbors���is especially unfortunate. Not only can we end up devoting time and money to things we don���t truly care about, but also we can end up feeling worse about ourselves, thanks to the damage caused by comparisons.

That brings us to the Easterlin Paradox. In 1974, economist Richard Easterlin noted that, while standards of living had climbed over time, happiness hadn���t���because what people cared about wasn���t their absolute standard of living, but how they stood relative to others. Such envy is a worthy member of the seven deadly sins, not least because it causes us to be dissatisfied with our own situation and thwarts our efforts to declare ���enough.���

Unfortunately, I fear we can never fully escape feelings of jealousy. But perhaps we could at least be more skeptical when we hear about the success of others. All too often, we assume that those with more money, fancier titles and great fame are happier. But when we focus on their outward success, we focus on just one aspect of their life���and we may be missing the true story.

A recent example: For a dozen years starting in the mid-2000s, we were bombarded with glowing stories about Angelina Jolie and Brad Pitt, and yet current litigation has revealed that the PR blitz covered up a far rockier relationship. But we don���t need to read about Brangelina to realize there���s often a disconnect between image and reality.

All of us know others who have apparently enjoyed greater worldly success. Do these folks have happier lives? We can never know for sure. There���s much that goes on behind closed doors that���s unseen by the rest of the world. But among the more successful individuals you know, I���m sure you���ve seen enough to have some sense of whether they���re enjoying life more than you���and I���d bet at least some strike you as less happy.

While we���re being skeptical of the fa��ade presented by others, we should also take a closer look at our own choices. There are all kinds of things that, when I was in college four decades ago, I recall friends raving about and which I thought I liked, but I���ve since had second thoughts about: lying on the beach, heavy Italian food, traveling in the developing world, sports cars, going to and giving parties.

This, I believe, is one of the great benefits of growing older: We have a lifetime of experiences to reflect upon, and hence a more finely tuned sense of what���s a waste of our time and money���and what does indeed resonate.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.

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Stellar Results

THE NATIONAL Aeronautics and Space Administration (NASA) has good reason to boast. Its programs serve as a catalyst to generate billions of dollars of economic activity that���s spread across all 50 states and the District of Columbia. Also, the transfer of NASA��spinoff technologies and products to private businesses improves the lives of each of us in myriad ways.

Along the way, it���s even put men on the moon���and plans to do so again, along with the first woman.

A couple of years ago, NASA released a comprehensive��analysis of the economic impact the space agency has had. It estimated that NASA���s 2019 budget of $21.5 billion spawned $64 billion of economic activity, and supported more than 312,000 good-paying jobs nationwide.

In addition, the work of NASA engineers touches all of us. Whether it's an omega-3 fatty acid in baby formula or the memory foam that helps our aging bodies sleep well at night, there���s a good chance that NASA knowledge benefits us every day of our lives.

In 2019 alone, the work of the agency���s personnel generated 85 new patent applications, and 122 new patents were approved. Many of these innovations eventually find their way into private businesses and American homes.

NASA makes a strong argument for the economic benefits that accrue to Americans through its efforts. But as great as they are, I think there���s another economic star to celebrate in our lives���one that���s arguably delivered even greater financial benefits: the index fund. Its results have been an epic success since its introduction in 1976.

The total amount invested in passively managed index funds eclipsed that in active funds for the first time this year, and for good reason: They outperform them. A recent report found��that 95% of actively managed large-cap stock funds lagged their benchmark index over 20 years. A big reason index funds perform better is because they charge so much less, allowing investors to save an astronomical amount of money.

Index funds helped us avoid a cumulative $357 billion in fund management fees from 1995 to 2020, according to S&P Dow Jones Indices. Their low expense ratios also put downward pressure on the fees charged by��active funds, which have fallen 34% since 1996, according to the Investment Company Institute.

Accumulating sufficient savings for retirement requires a massive effort, and we need every advantage we can get. The low cost of index funds helps us keep more money within our own orbit���and out of the pockets of active fund managers. That cost savings is a crucial part of the compounding that multiplies our money so it can support us in our later years.

NASA is amazingly complex. Index funds are wonderfully simple. Yet, in their own way, they each deliver stellar results.

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