Jonathan Clements's Blog, page 182

Roth to the Max

WITH THE FINANCIAL markets down sharply, this is a great time to fund a Roth IRA, with its promise of tax-free growth. But the rules can be tricky.

The basics: You place part of your after-tax earned income in a Roth, invest it and���ideally���just leave it to grow. As long as the money stays there until you reach age 59��, and you wait at least five years, you can tap the account without owing a dime in taxes.

Let���s say Roxie puts $6,000 in a Roth IRA at age 25 and invests in a diversified portfolio of stocks. Her portfolio returns 7% per year until she hits age 60, at which point it���s worth $64,059. When she withdraws her money to spend it, she won���t have to pay any taxes on her $58,059 profit. Pretty sweet, right?

The annual limit for Roth IRA contributions is currently $6,000, or $7,000 for those age 50 and older. In 2023, those limits rise to $6,500 and $7,500. Not everyone can use a Roth IRA, however. Roth IRAs come with income limits, something many investors don���t realize until they see a penalty on their tax return.

If your tax filing status is single or head of household, your Roth IRA eligibility starts to phase out once your modified adjusted gross income reaches $129,000 in 2022 and gets completely phased out once your income tops $144,000. If your tax filing status is married filing jointly, your eligibility starts to phase out at $204,000 and is completely phased out at $214,000.

The penalty for making a Roth IRA contribution when you aren���t allowed is fairly steep. You���ll pay 6% every year on the excess amount you contributed, and that 6% penalty recurs annually until the situation gets fixed.

In our example, if Roxie made a $6,000 Roth contribution in 2022 and was over the income limit, she would face a $360 penalty each year until she no longer had any excess contribution. The simplest remedy is to withdraw the money and any earnings by the tax filing deadline, including extensions.

What if your income is over the limit? There are three common workarounds.

First, if you have a 401(k) or 403(b) at work, you may have the option to make Roth contributions to that account. The 2022��contribution limit for these employer-sponsored plans is much higher���$20,500 this year for people under age 50 and $27,000 for people 50 and older���so you can build up your Roth savings much more quickly.

Second, if you have additional room to save after contributing to your employer���s plan, you can try the "backdoor Roth" maneuver. This involves making a nondeductible contribution to a traditional IRA and then doing a Roth conversion. The process here can be somewhat involved, so it���s a good idea to contact a financial planner for help. If you have money in a traditional IRA from a previous 401(k) rollover, it becomes much harder to pull off the Roth conversion without paying some taxes.

Third, if your employer���s plan allows it, you can try the ���mega-backdoor Roth��� maneuver. Yes, that���s the actual name. This involves putting after-tax money into your 401(k) over the $20,500 annual limit, and then immediately converting it to Roth 401(k) money within your plan or by distributing it to a Roth IRA. To pull this off, you���d need to find out if your plan allows after-tax, non-Roth contributions, and if it allows either in-service distributions or an in-plan conversion. Again, consider contacting a knowledgeable financial planner for help, because this can get complicated.

Simpler is usually better when it comes to your finances. But building up Roth money is a case where the juice is actually worth the squeeze. I tell my financial planning clients that we want to build tax diversification. Ideally, by the time they retire, they should have a balanced mix of traditional retirement accounts, Roths and regular taxable accounts.

Many retirees who have amassed some wealth feel boxed in because the majority of their money is tied up in home equity and traditional retirement accounts. Building up a healthy-sized Roth can ease that problem���by providing the flexibility to spend without worrying about taxes.

Matt Trogdon is a financial planner with Craftwork Capital, LLC. He's based in Washington, D.C., and has a special interest in helping Gen X and Gen Y families. He also serves as a workshop instructor for the Babson College Financial Literacy Project.��Follow Matt on Twitter��@Matt_Trogdon��and check out his earlier articles.

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Ready for Rough Times

AS INFLATION continues to run hot, wage gains for the bottom quartile of income earners are almost keeping pace with consumer prices. Meanwhile, checking account balances for this group remain more than 50% above pre-pandemic levels.

Is everything A-okay? Of course not. Still, I���d argue that many Americans have positioned themselves well to weather an economic downturn. Another sign: Average credit scores are much improved from, say, the mid-2000s, when families were loading up on debt and speculators were snatching up houses only to flip them months later.

According to Bank of America���s third-quarter earnings report released last week, the average FICO score among the firm���s credit card customers was a solid 770. That���s a smidgen higher than was reported in the same quarter a year ago.

Another bright spot for everyday Americans: Natural gas prices have plummeted. After surging to almost $10 per MMBtu during the summer, the spot price for U.S. Henry Hub natural gas is back under $5. That's the lowest level since March. Families might not face home heating bills this winter that are as steep as some forecasters had feared earlier this year. Meanwhile, utility bills across the pond should also be less severe now that European natural gas prices are down 67% from their 2022 peak.

But there is, of course, also bad news. Mortgage rates have surged to their highest level in nearly 22 years, with new 30-year loans now above 7%. It���s hard to fathom how the housing market avoids a collapse in monthly transactions. Between steep lending rates and still sky-high real estate prices, prospective borrowers face huge costs, while homeowners who secured a low mortgage rate will likely sit tight for as long as possible.

These are strange times for consumers. But with strong household balance sheets and the job market continuing to hum along, most families should come through these tough times in decent shape.

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Telling Tales

WHEN I WAS IN SCHOOL, corporate executives often visited for guest lectures. Two of these presentations still stand out in my mind.

The first was the CEO of a company then called Flextronics���now simply Flex. It's a contract manufacturer that assembles products for other companies. Apple, for example, doesn���t have factories of its own and instead��relies on��outsourcers like Flex to build its products, usually in Asia.

You might wonder why a presentation like this would be memorable. After all, Flex manufactures mostly mundane products���things like laptop chargers. It was memorable, though,��because Flex���s CEO was as entertaining a speaker as I���d ever seen���so entertaining that, when I left the��presentation, my first thought was to buy Flextronics stock.

The second speaker was then the CEO of Hewlett-Packard. Because it���s such��a��well-known company, she was more of a public figure than the Flextronics CEO. A few years later, in fact, she was a contender in the presidential primaries. But I found her presentation stultifying, and thus HP stock seemed less interesting.

Because I was a student, I didn���t buy either stock. But it���s worth looking back to see how an investor would have done with each. Both Flextronics and HP have significantly��underperformed��the overall market, and Flextronics���the company with the more entertaining CEO���has fared worse.

Adam Grant is a professor at the University of Pennsylvania���s Wharton School. In his book��Think Again, Grant describes three approaches to communication. He calls them the preacher, the prosecutor and the politician. Depending on the situation, people can shift in and out of these three��modes.

Here���s how Grant describes each one: We use preacher mode ���when our sacred beliefs are in jeopardy; we deliver sermons to protect and promote our ideals.��� We employ prosecutor mode when we want to prove someone wrong and ���win our case.��� And we switch into politician mode ���when we���re seeking to win over an audience.���

When I read these descriptions, it occurred to me that these two CEOs��� presentations provided a microcosm of a challenge regularly faced by investors: We hear a lot of stories, told by talented storytellers, and need to make sense of them.

In the past, I���ve��referenced��Nobel Prize-winning economist Robert Shiller���s book��Narrative Economics. The thesis: Stories can move markets. Because a good story is easy to tell and easy to understand, it can be much more convincing than a chart or a graph. If a story is compelling enough, people will overlook the details. One consequence: Narratives can have outsized results���potentially to investors��� detriment.

Grant���s preacher-prosecutor-politician framework helps further explain how stories can spread. Skilled storytellers don���t just tell stories. They know when to employ each of these three modes to bend people to their point of view. That was my experience in the Flextronics presentation: The story was told��so convincingly��that I almost bought the company���s stock.

Sometimes, it���s easier to see through a story. I recall another presentation, in the fall of 2008. An investment manager visiting my firm was defending BlackBerry, then called Research in Motion. The iPhone had been introduced about a year earlier and was quickly gaining share.

BlackBerry looked like it was in trouble, and the company���s stock was falling. As a result, my colleagues expressed skepticism. The investment manager, though, shifted into preacher mode. Raising his voice, he let us know, ���I play tons of golf with Jim Balsillie,��� then the co-CEO of BlackBerry, and assured us, ���these guys didn���t suddenly become stupid.���

In this case,��the��situation for BlackBerry was clear enough that even skilled preachers had a hard time painting an optimistic picture. Most investment situations, though, aren���t as clear. Virtually every investment carries a mix of potential positives and negatives. That makes these investments susceptible to storytellers and their compelling tales.

What���s the solution? Grant suggests that the right response when we encounter a preacher, a prosecutor or a politician is to adopt the mindset of a scientist. Seek facts and data before accepting any narrative.

In general, I agree with that. Still, when it comes to investment decisions, even the most scientific approach faces an Achilles��� heel: Financial markets are complex systems, and no one knows exactly how things will turn out. Being a scientist isn���t enough. Here are some additional strategies to help navigate this challenge:

Consider the source of the story.��Is it coming from a journalist or another source that should be unbiased? Or is it coming from a source that might have an agenda? In March 2020, for example, a well-known hedge fund manager��declared�����hell is coming.��� It turned out that he had a short position in the market���betting that stocks would fall further. To one extent or another, many people have agendas. That���s not necessarily a problem; you just need to be aware of it.

Ask yourself whether the source might be suffering from cognitive dissonance. That���s the unsettled state that arises from holding conflicting information, and was likely the reason BlackBerry���s managers refused for so long to believe that consumers would want the features the iPhone offered, such as a web browser and text messaging.

Don���t be too impressed by an expert���s track record.��As I���ve��noted before, stock market prognosticators are notorious for being right one time in a row. I know someone, in fact, who predicted the name of her future husband in her high school yearbook. That kind of thing is remarkable���but probably not repeatable.

Consider the methodology.��Investment people love pithy sayings. It doesn���t mean they���re always wrong, but it does mean you want to maintain a critical eye. When you hear a story, ask about the data behind it.

Diversify.��Grant highlights Bernie Madoff���s Ponzi case as one in which preachers, prosecutors and politicians all conspired to dupe investors. Madoff���s crimes would have been far less damaging, though, if his investors hadn���t handed over their entire life���s savings, as many did. When you diversify, no single investment can cause you too much harm.

Remember that trends don���t move in one direction only.��Consider the trend toward globalization. Using firms like Flex, American companies have benefited by moving production to lower-cost regions. The entire U.S. economy benefited. As we moved more product assembly overseas, it helped keep costs���and thus inflation���low. Recently, this trend has unexpectedly started to reverse. More firms are bringing production back to the U.S. Flex, for example, is helping Apple with manufacturing in Tennessee and Texas. The recently-passed CHIPS Act also will boost ���de-globalization��� by providing incentives for domestic semiconductor production. The lesson: Never bet too heavily on any particular version of the future.

Recognize that things can happen that we���ve never seen before and that we might not think possible.��Adam Grant references Albert Einstein, who had a hard time accepting a new theory, quantum mechanics. I asked a physics professor to help me understand this, and he related this exchange between Einstein and his rival, Danish physicist Niels Bohr.

In arguing that quantum mechanics defied the laws of physics, Einstein told Bohr, ���God does not play dice with the universe.���

Bohr retorted, ���Don���t tell God what to do.���

In other words, Bohr was cautioning Einstein to be careful of preconceived notions. The laws of physics might be different from what Einstein assumed them to be. In the years since, this argument has been settled, and it turns out Bohr was right.

The lesson: Accepting new ideas is often difficult, but it can be especially hard when there���s no precedent. In managing our personal finances, we can���t plan for everything, but it���s important not to dismiss possibilities just because they seem improbable.

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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Budgeting Time

FIVE YEARS AGO, I realized I���d spent my adult life doing something that was totally unnecessary���drying my hair with a hair dryer. I���m not sure why I got into the habit, but one day I realized it made zero difference to my appearance. I���m not saying using a hair dryer is a bad use of time for others. But for me, it was a minute or so each day that was completely wasted.

And it isn't just the hair dryer that I've ditched. I���ve become ever more parsimonious about time. I spend as little of it as possible on shopping. I don���t currently own a car, and I couldn't be happier. That's one less thing to deal with. I put off chores���doing laundry, upgrading my cellphone, tidying the garden���until they���re absolutely necessary. Instead, I want to devote as much of each day as possible to the things I care about most: time with loved ones, time outdoors, and writing and editing.

We all know time is the ultimate limited resource, but we sure don���t act that way. Many folks closely track how their dollars are spent and invested. But how about our use of time? It strikes me that time allocation is far more important than asset allocation, and yet most of us aren���t nearly as rigorous about it. That got me to thinking about six ways we can conceptualize our use of time:

1. Fixed vs. discretionary. We often divvy up our spending between fixed monthly costs and those expenses that are at our discretion. But the notion applies equally well to time.

There are things we have to do and things we want to do. If we love the things we have to do, that���s great. What if we don���t? That���s when they become a chore, and we���ll likely improve our happiness if we pay others to do them for us. That way, we can devote more hours to discretionary activities���the stuff we really enjoy doing.

For those in the workforce, their job will be their biggest fixed time commitment. That���s why it���s so important to like your work. What if you don���t? There���s this thing called financial freedom, where your time becomes largely your own, and the way you get there is by saving diligently and investing prudently.

2. With others vs. alone. One isn���t superior to the other. Rather, unhappiness will likely result if we spend all our time with others or all our time alone. As someone who sits hunched over a laptop most of the day, I treasure the time I have with others and would happily spend more time doing so. But I can also imagine that others feel just the opposite, hungry for time alone to read and think, after too many hours each day with family or colleagues.

3. Indoors vs. outdoors. Being in nature is associated with a slew of mental health benefits. Ditto for exposure to sunlight, which can also help our physical health. I try to get outside every morning for a bicycle ride and I try to take a walk every afternoon. All this grows less inviting as winter approaches, and the days grow shorter and colder. But I still make it a point to get outside���because I know I feel better when I do.

4. Active vs. passive. Americans spend fewer hours working and have more free time than they did in the 1960s. Problem is, we���re spending much of this free time passively sitting in front of the television, which doesn���t rate well in terms of happiness. Instead, we should strive for active engagement���things like seeing friends, playing sports, volunteering and pursuing hobbies, all of which have the potential to boost happiness. We���ve all heard it before, but it���s still a shocking statistic: Americans spend an average three hours a day parked in front of their TVs.

5. Investing vs. personal finance. Many folks check��the stock market���s performance every few hours and their financial accounts every day. They spend countless hours fretting over whether they own the right investments. Yet ample research has shown that once we do the investment basics���settle on a sensible asset allocation, decide how to diversify and pick some low-cost funds���further effort is typically a waste of time.

Meanwhile, we tend to spend too few hours on broader personal finance issues: managing taxes, developing an estate plan, getting the right insurance, holding down borrowing costs, reviewing spending, deciding when to claim Social Security, developing and revising our financial plan, and so on. That���s a shame. Unlike investing, these are all areas where a little effort can yield big benefits.

6. Hedonic vs. eudaimonic happiness. I discussed this distinction last month. Going out to dinner with friends can deliver hedonic happiness���a pleasurable interlude that delivers a brief boost to our spirits. By contrast, planting bulbs that���ll flower next spring can deliver eudaimonic happiness. Getting on our knees and digging in the dirt is taxing, but there���s also satisfaction involved, as we imagine how great the garden will look six months later.

As I argued in my earlier article, we should pursue both types of happiness. Want to get more from each day? Ponder how you���re divvying up your time between hedonic and eudaimonic happiness���and make sure there���s a good balance between the two.

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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Everyone’s a Critic

WE RECEIVE A LOT of criticism over our adult life, most of which we ignore. Are we being defensive and stubborn���or is something else going on?

Criticism implies we should change our behavior in some way, but sometimes that change comes with costs that outweigh the benefits. Consider the three main forms of criticism:

Manipulative criticism. This is perhaps the most prevalent form of criticism. The goal is to promote a change in our behavior, often costing us time or money, while the criticizer stands to benefit from the promoted change.

Manipulative criticism can come at us from many directions. Check out the subtle criticism often implied in advertisements that goad us to buy or invest. Be alert to ���M&Ms������claims that mankind or Mother Earth will benefit from our sacrifice, even if there���s no tangible benefit to us individually. Warning: It���s been rumored that even spouses may engage in manipulative criticism.

Jealous criticism. ���I know they���re rich but they���re probably not happy.��� ���He got lucky.��� ���She didn���t play fair.��� And what about all the ���evil traits��� of those who occupy the top 1% in wealth? It���s a funny thing, but jealous criticism always seems to target people who have more money or have enjoyed greater success than the criticizer.

Constructive criticism. There is indeed beneficial criticism, though it���s less prevalent than other forms. Criticism designed to help us usually comes from someone who likes us and expects no personal reward, and it may lead us to be healthier, wealthier and happier.

My advice: Before we ignore or act on criticism, consider the motives involved.

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Back Where I Started

AT LOOSE ENDS DURING the summer of 1967, when I was between college graduation and the start of my psychology training, I chanced upon a book by . An early advocate of no-load mutual fund investing, Jacobs���s book and his subsequent No-Load Fund Investor newsletter provided my market mantra until exchange-traded index funds (ETFs) started taking off circa 2000.

Buying directly from the fund company, and thereby bypassing brokers and their upfront 8.5% commission, was a roguish development in the notoriously button-down mutual fund community. Just toss a check in the mail and���voila���you owned shares in a stock portfolio. To a nerdy introvert with a knack for numbers and a hankering for money, it seemed like a miracle.

It wasn���t long before I traded my RollingStone magazines and conspiracy books on the Kennedy assassination for Barron���s and The Wall Street Journal. I purchased a subscription to The Growth Fund Guide,��a market glossy that followed the performance of 10 or so no-load mutual funds. Alongside each written description was a graph plotting the progress of the fund over the past year. All the lines sloped from the bottom left to the page���s upper right corner. One in particular looked like it was laced with testosterone. It belonged to the Janus Fund, and so began my whirlwind tour as an unknowing momentum investor.

In my family, the road to manhood was paved with money, and I felt pressure to prove my worth. I set aside my interest in mutual funds and turned my attention elsewhere. Options became my solution for making it big and in a hurry. But anxious to avoid large losses, lest I become a family pariah, I often set my stop-loss orders perilously close to the current price and would be taken out by an innocuous dip.

A friend once told me that my anxiety and manic tendencies were a poor fit for options trading. He was, of course, right. Fortunately, I was an impoverished student back then. My dollar losses were modest, even if my percentage losses weren���t, and I managed to walk away with more damage to my ego than to my wallet.

A few years later, I found success investing in rental properties and became less haunted by the family mandate. I also reconnected with my old friend, the mutual fund, this time as a growth-at-a-reasonable-price investor. But I was disenchanted by the bear market of the early 1980s.

I still remember a memo that John Neff, manager of the storied Vanguard Windsor Fund, wrote to his fellow portfolio managers on a particularly harrowing day: Don���t be afraid to buy. I was struck by the courage and confidence of the message, which influenced my gradual transition to becoming a value investor. As I grew more aware of my counterproductive need for excitement, I was able to make the leap from youthful impulsivity to long-term investing���a strategy I had once mocked as pedestrian.

When I returned to mutual fund investing, index funds were still a revolution in the making. If they���d been around, I would not have beaten them. In the venerable Forbes mutual fund rating system, I would likely have been a B- investor in both up and down markets. What if, from my 1967 introduction to investing, I���d simply stuck with almost any plain-vanilla fund that averaged 10% annually? I would have earned an A+ on my financial scorecard.

Over the decades, I���ve given myself much grief for sacrificing the bottom line in my quest for parental approval and market-beating returns. I can���t say I���m at peace, but I���ve come a long way. As the British poet William Henley wrote in 1875, after amputation of his infected left leg, ���My head is bloody, but unbowed.���

The ETF wave that formed about 20 years ago carried me along with it. I have been an avid participant and need not recite here the many advantages over the flat-footed mutual fund. But today, at 77 and beset by the infirmities of old age, I am approaching the time when the race is over and the baton must be passed. I want to leave my wife and son a portfolio that suits their needs.

All this nostalgia and self-reflection has led me back to my trusted companion, the much-maligned mutual fund. My wife Alberta has been schooled in how they function and their idiosyncrasies, and feels more comfortable managing them than she would eyeballing a list of ETF symbols with prices blinking every five seconds on a blue computer screen. She won���t care for real-time trading and she���s certainly not going to be placing any stop-loss orders.

What she will require are automatic investment and withdrawal privileges, along with no bid-ask spreads. I want her to have access to the assistance and free advice of phone reps, and I���ve found such help more on offer for mutual funds than ETFs. After I���m gone, Alberta will have enough in her life to contend with, and shepherding her liquid assets should be as simple and free of worry as possible.

The search for funds has always been a joy for me, and I already can hear the clarion call of one that may provide the core. Vanguard Total World Stock Index Fund (symbol: VTWAX) offers cheap exposure to domestic and foreign markets, and will remain broadly diversified even after Alberta raises cash or makes an investment. So, yes, 55 years on, I���m back to owning mutual funds. Often, what appears to be the end is also a new beginning.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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It’s Taken a Lifetime

I'M TOO EMBARRASSED to reveal how long it took my wife and me to prepare our wills. We knew this important task was near the top of almost every financial “to do” list—a list that, it seems, we’ve spent our adult lives slowly working our way through.

We’d discussed the details of our wills, including the crucial decision of who would care for our minor child in the event both of us died. Despite this, we procrastinated. When we finally met with an attorney and signed the papers, it was a relief to mark it off the list.

While we were at it, we drew up advance directives to allow others to make legal and medical decisions for us if we became incapacitated. These documents let us have a hand in those decisions by making our wishes known beforehand. I’d learned from my father’s final illness how advance directives can ease a family’s burden during an already-stressful time.

I also added letters of instruction to help my family settle my affairs. Included in these are legacy letters with the words of love that I want my family to remember me by. The reality is, most of us aren’t thinking or speaking clearly at the time we leave this world. I’ve put my thoughts on paper now, before dementia or serious illness renders me unable to.

What else has been on our to-do list? One of our running family jokes is that it’s okay to die, just don’t get sick or sustain a serious injury. As a precaution, I’ve always had some disability insurance through my employer, though probably not enough. A severe medical problem can be a double whammy to a family’s finances. Earlier in our adult lives, a loss of one income, plus a boatload of medical expenses, could have sunk us. Now, we can fall back on our investments, but we probably weren’t smart about the amount of risk we took earlier on.

On the other hand, we made a good decision when our daughter was born. My wife and I each bought term life insurance. Our goal was to cover the loss of income if one of us died. At the time, my wife and I worked side by side at the same physical therapy clinic. Because we drew essentially the same salary, we purchased policies with equivalent death benefits.

My wife went part-time after the birth of our daughter, and then to one day a month a few years later. Even so, we’ve kept the original policies. Her current income is just a fraction of the previous amount, but her value to our family is huge. I want sufficient coverage to replace part of the contribution she now provides. The policy premiums have bought us both peace of mind.

We’ve made some other wise moves—which perhaps balance out some of our earlier negligence. Most important, we’re in the habit of spending less than our income. Among other things, that provides us cash for unexpected expenses. Our emergency fund keeps us from having to reach for a credit card to pay for a new water heater or major auto repair.

Controlling our spending also lets us save money for retirement. Even so, we could have done a better job if we’d started earlier. We delayed investing until our mid-30s. By showing up late to the starting line, we potentially missed out on a decade or more of compounding. A timelier start might have given us a more comfortable retirement and perhaps even the option to retire early.

At this juncture, we’ve paid off all debt. We wanted to lower our fixed costs, especially as we look ahead to retirement. Some argue you’ll make more if you invest any extra cash. That may be true. But for us, there’s no debate. Even if it’s not always the optimal choice, we’d rather be debt-free. We think that eliminating debt lowers our overall risk.

In addition, we strive to give away part of our income. We try to be thankful for what we have, and to show it by giving to our church and to those in need.

Our family’s plan for managing our finances and the risks we face has been a work in progress, but it feels like we’ve finally made it through the to-do list. The pieces are now in place, but they didn’t get there all at once. We’re just glad a calamity didn’t befall us when one of the pieces was missing.

Ed Marsh is a physical therapist who lives and works in a small community near Atlanta. He likes to spend time with his church, with his family and in his garden thinking about retirement. His favorite question to ask a young person is, "Are you saving for retirement?" Check out Ed's earlier articles.

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Striking a Balance

LIFE IS THE ULTIMATE juggling act. We need to balance work, family, hobbies, friends, money and passions. All play and no work won’t keep the electricity on—but all work and no play will make Jack a crummy dad. To do both, we must have balance.

Balance can be observed in all areas of life. Grass needs water to grow, but too much and it’ll drown. Difficult experiences are hard, but often they make us stronger and wiser. Success is great, but it can make us complacent. Money can be a tool, but it can also become a tyrant. We need sunlight for vitamin D, but we can also get skin cancer from too much.

Balance is especially crucial when it comes to managing time. For everything we say yes to, there’s an equal and opposite no to something else. By deciding to spend an hour watching TV, we say no to reading a book. By deciding to work late every night, we say no to time spent at home. Who’s to say which are the right choices? The point here is that the equilibrium is indisputable—one always comes at the expense of the other. The scale is always balanced.

Money works the same way. If we spend $200 on a white tablecloth dinner at a swanky restaurant, we say no to spending $20 on 10 occasions at our favorite lunch spot. By spending $20,000 on a kitchen remodel, we say no to four $5,000 vacations. A dollar saved today is a rejection to all the options we could have spent it on. Conversely, the more we spend today, the more we sacrifice our future spending power. My contention: The important thing is to focus less on which choices are right or wrong—and more on whether we’re striking the right balance.

If we always live in the now, we won’t be prepared for our future financial needs. On the other hand, if we save every penny and never enjoy ourselves currently, we could leave life on the table. I see it all the time. Folks save their entire life, rarely spending frivolously to enjoy the now. Then retirement rolls around and, three months in, they get a terminal diagnosis.

That’s why I’m a big fan of financial planning and budgeting. If we know how much we need to save to achieve our goals, it makes it more comfortable to freely spend whatever’s left over. If we have a budget with a line item for guilt-free spending, we can enjoy that money without remorse. If we have a big purchase coming up that we save for over time, it’s much less stressful than the alternative—borrowing the money and paying it back.

Sometimes, I believe we can get entrenched in black-or-white, all-or-nothing binary decision making. That’s not how life works. We can take some risk out of a portfolio without selling everything we hold. We can have our favorite overpriced coffee drink and still achieve our financial goals. With planning, we can build a life that delivers what’s important to each of us, both now and in the future.

Luke Smith is a CFP® professional and practicing financial planner. He creates customized financial plans for each family he works with around the country. Luke pursued financial planning to combine his two favorite passions: finance and people. He spends his free time with his wife Heather and their family in Maryland. Outside of work, Luke enjoys the outdoors, golf, reading and writing. You can reach him at  Luke.Smith@Wealthspire.com. Check out Luke's earlier articles.

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The Way to Wealth

BEN FRANKLIN WROTE the most popular personal finance text of the 18th century. Originally published in 1758 as an essay in his Poor Richard���s Almanack, it became a perennial bestseller when printed separately under the title The Way to Wealth.

You can read the 1810 version printed in London at no charge, thanks to Project Gutenberg. I assign it to students in my behavioral economics class, and it sparks a discussion about whether thrift and hard work are still the routes to financial security. Franklin's story begins with a distinctly modern tone.

While waiting for an auction to start, a group of neighbors complains that their taxes are too high and will ruin the country. They ask a wise man, called Father Abraham, to advise them. He climbs up on a tree stump and agrees that taxes are high���and then adds this retort: ���We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly.���

Then he���s off and running on a rhyming rap that strings together many of the best-known sayings on thrift, industry and saving in the English language. Interestingly, it doesn���t include the quote most often attributed to Franklin, which I���ll add at the end.

Here are 10 sayings from the story. A couple are still widely known even after two centuries:

���Early to bed, and early to rise, makes a man healthy, wealthy, and wise."
"Never leave that till tomorrow, which you can do today."
���There are no gains without pains.���
"What maintains one vice, would bring up two children."
"Sloth makes all things difficult, but industry all easy; and he that riseth late, must trot all day, and shall scarce overtake his business at night; while laziness travels so slowly, that poverty soon overtakes him.���
"Employ thy time well, if thou meanest to gain leisure; and, since thou art not sure of a minute, throw not away an hour."
���When you have bought one fine thing, you must buy 10 more, that your appearance may be all of a piece.���
���It is as truly a folly for the poor to ape the rich, as for the frog to swell, in order to equal the ox.���
���If you would be wealthy, think of saving, as well as of getting. The Indies have not made Spain rich, because her out-goes are greater than her incomes."
"For age and want save while you may, no morning sun lasts a whole day."

The rhyming couplets are easy to remember but hard to obey. Mark Twain complained in an 1870 essay that Franklin���s maxims marred his childhood. ���The boy is hounded to death and robbed of his natural rest,��� Twain wrote, ���because Franklin, said once, in one of his inspired flights to malignity: Early to bed and early to rise make a man healthy, wealthy and wise.���

Even Franklin honored his sayings only intermittently. He caused a sensation when he wore a plain brown coat and no wig when presented to King Louis XVI as the U.S. ambassador to the court of Versailles. Yet he also lived in a nearby mansion, where he kept nine servants, including a coachman, gardener and cook.

Franklin concedes that his good advice will be ignored, as he reveals in the story���s ending: ���Thus the old gentleman ended his harangue. The people heard it, and approved the doctrine, and immediately practised the contrary, just as if it had been a common sermon; for the auction opened, and they began to buy extravagantly.���

The oft-quoted saying that doesn���t appear anywhere in The Way to Wealth is, ���A penny saved is a penny earned.��� According to Philadelphia���s Franklin Institute, the closest Franklin came to penning those words was in his 1737 Poor Richard���s Almanack, in which he wrote, ���A penny saved is two pence clear.���

Paradoxically, to honor him, visitors pitch pennies onto the gravestone erected after Franklin���s death in 1790. Christ Church Philadelphia even undertook a Gofundme campaign to, among other things, repair the damage from the penny pelting. I imagine that Franklin would be pleased to be remembered for so long, even if his admirers throw away his best-known advice.

Greg Spears is HumbleDollar's��deputy editor.��Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger���s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph���s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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Cold Comfort

MY HUSBAND AND I CAN now say we survived our first Arizona summer. When we moved from Portland, Oregon, to Phoenix, we weren���t sure how we���d cope with the abundant sunshine. There was also another unknown: How much would it cost to keep our home comfortable when the temperature outside soared?

We heard stories about residents in our retirement community paying upward of $350 a month for electricity during the summer season. Since we���re living on a fixed income, we began researching ways to help control the cost of cooling our home.

Our first step? Having 19 solar panels installed on the roof. While the initial cost was steep���$15,000���we felt confident that, over the 30-year lifespan of the panels, we���d eventually recoup our costs.

Next, we replaced many of the 40-year-old light fixtures in our home. We installed LED fixtures which, in addition to being energy-efficient, give off far less heat than incandescent bulbs. We had a smart thermostat installed as well. By signing up to participate in an energy-savings program through our electricity provider, the thermostat and its installation were free.

Once the thermostat was installed, it took my husband and me a few days to compromise on temperature settings. Like most couples, we differ in our temperature preferences. I tend to tolerate heat better. We ultimately settled on keeping our home at 78 degrees during the day and 74 degrees while we slept. While those settings would have been uncomfortably warm for us in Oregon, 78 degrees felt refreshing on a 114-degree day in Arizona.

Over the course of the summer, we also adjusted our daily schedule to align with the lower electricity rates we get during certain hours of the day. On weekdays, our rates are substantially higher between 4 p.m. and 7 p.m. This means making a concerted effort to run most of our appliances either early in the day or late at night.

How did our finances fare during our first Arizona summer? Since our solar panels were installed in January���but we didn���t move into our home until May���we accumulated nearly $150 in credits toward our summer electricity bills. This meant our first bill with a balance due didn���t arrive until August.

During July and August���the two hottest months in Arizona���our electricity cost averaged about $3.50 per day. We were so pleased with the reasonable cost, we decided to have two small air-conditioning units installed in our garage and utility room���two areas of our house that weren���t cooled by our large rooftop unit. Even with the addition of those units, our average electricity cost is still well below $4 per day.

We suspect that, by November, we may achieve a ���net zero��� electricity bill. During the winter months, our utility plan changes over to a different schedule of hourly rates. Between 10 a.m. and 3 p.m., our electricity use will be charged at a ���super off-peak��� rate. That rate is currently less than the crediting rate from our utility provider for the solar energy we produce. By strategically running our appliances during those daytime hours���combined with less extreme outdoor temperatures���it���s possible we may even rack up a few dollars in credits to use next summer.

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