Jonathan Clements's Blog, page 216
April 22, 2022
Sick and Tired
BETWEEN 1972 AND 2018, the percentage of Americans who described themselves as very happy ranged from 29% to 38%. The number for 2021 was recently released: Just 19% of us said we're very happy���10 percentage points lower than any prior survey.
Our happiness, it seems, is another victim of the pandemic. Indeed, COVID-19 and the resulting social isolation has delivered a bigger blow to our collective happiness than 2008-09's Great Recession, 2001's terrorist attacks and countless other distressing events from the past half-century.
These results come from the General Social Survey��(GSS), which is the go-to source for data on American happiness. The survey is often used to highlight the negligible impact of rising standards of living on our happiness. For instance, in 2018, 31% of Americans described themselves as very happy, barely different from the 30% who gave that response in 1972, the first year that the survey was conducted. Over the intervening 46 years, U.S. inflation-adjusted per-capita disposable income climbed 131%.
More money, it seems, hasn't bought happiness. One reason: We care less about our absolute standard of living, and more about how our financial lot in life compares to that of others. That suggests that the past few years, with a rocky economy that's affected most of us, wouldn't necessarily send us into a funk���and, indeed, if the recent decline in reported happiness was solely about money, you'd have expected all those stimulus checks and other federal government goodies to have softened the blow.
The GSS slices its data by age, education, political affiliation and so on. No matter which group you look at, happiness was down in 2021 compared to 2018, though the size of the decline often varied. For instance, while the percentage of men saying they're very happy dropped from 31% to 21% over the past three years, the decline among women was notably larger, from 31% in 2018 to 18% in 2021. One possible explanation: With children forced to learn remotely, mom ended up shouldering a large part of the resulting burden.
Another intriguing insight: Republicans saw a far smaller drop in happiness than Democrats and independents.��The GSS's 2021 survey also found a 15-percentage-point drop over the past three years in those describing life as exciting, a five-point drop in Americans' satisfaction with their financial situation and a 13-point decline in those who agree that their standard of living has a good chance of improving. Will 2022 bring a big rebound in our reported happiness? Rising inflation, and tumbling stock and bond prices, won't help. But in terms of happiness, the crucial issue, I suspect, is how quickly daily life returns to something that looks like normal.
Our happiness, it seems, is another victim of the pandemic. Indeed, COVID-19 and the resulting social isolation has delivered a bigger blow to our collective happiness than 2008-09's Great Recession, 2001's terrorist attacks and countless other distressing events from the past half-century.
These results come from the General Social Survey��(GSS), which is the go-to source for data on American happiness. The survey is often used to highlight the negligible impact of rising standards of living on our happiness. For instance, in 2018, 31% of Americans described themselves as very happy, barely different from the 30% who gave that response in 1972, the first year that the survey was conducted. Over the intervening 46 years, U.S. inflation-adjusted per-capita disposable income climbed 131%.
More money, it seems, hasn't bought happiness. One reason: We care less about our absolute standard of living, and more about how our financial lot in life compares to that of others. That suggests that the past few years, with a rocky economy that's affected most of us, wouldn't necessarily send us into a funk���and, indeed, if the recent decline in reported happiness was solely about money, you'd have expected all those stimulus checks and other federal government goodies to have softened the blow.
The GSS slices its data by age, education, political affiliation and so on. No matter which group you look at, happiness was down in 2021 compared to 2018, though the size of the decline often varied. For instance, while the percentage of men saying they're very happy dropped from 31% to 21% over the past three years, the decline among women was notably larger, from 31% in 2018 to 18% in 2021. One possible explanation: With children forced to learn remotely, mom ended up shouldering a large part of the resulting burden.
Another intriguing insight: Republicans saw a far smaller drop in happiness than Democrats and independents.��The GSS's 2021 survey also found a 15-percentage-point drop over the past three years in those describing life as exciting, a five-point drop in Americans' satisfaction with their financial situation and a 13-point decline in those who agree that their standard of living has a good chance of improving. Will 2022 bring a big rebound in our reported happiness? Rising inflation, and tumbling stock and bond prices, won't help. But in terms of happiness, the crucial issue, I suspect, is how quickly daily life returns to something that looks like normal.
The post Sick and Tired appeared first on HumbleDollar.
Treasure in the Trash
MY MOST SUCCESSFUL investment is one that I tried to throw in the trash.
I own 126 shares of Anthem, a large health insurance company. I believe I got my shares on April 30, 2002. That���s when Anthem bought Trigon, a small insurer based in Virginia that my family used for health insurance.
In 1996, Trigon began the process of converting from a policyholder-owned company into a stockholder-owned company. It went public in 1997. Anyone who had a health insurance policy became a shareholder, including yours truly, who was age 14 at the time. In 2002, those Trigon shares were converted into Anthem shares.
I imagine Anthem sent me letters about my shares at some point, but I never received them. I was a sophomore in college, and my main concerns were studying, partying and downloading music on KaZaa (if you know, you know).
This was also a period of family upheaval. My grandmother, who raised me, had succumbed to dementia and was placed in a nursing home. My childhood home was sold, and there was a short window when I lacked a reliable mailing address.
By 2008, I had taken an interest in investing and started working at The Motley Fool. One day, a cousin suggested I enter my personal information into a ���lost money��� website. Crazy enough, the lost money thing worked. A couple of weeks later, Anthem sent me a letter. Dunce that I was, I looked at the envelope, thought it was an advertisement and promptly threw it in the trash. They sent me a second letter. I threw that one in the trash as well.
Finally, they sent me a letter with the words ���potential forfeiture��� on the envelope. I opened that one out of fear that I owed money. Imagine my surprise when I found out I was entitled to claim 126 shares of Anthem stock that were worth roughly $6,000. Anthem has soared since then, and it���s now one of my portfolio���s largest holdings.
When I���ve told this tale in the past, I���ve used it as an example of how buy-and-hold investing really can work. And it certainly has. I held Anthem shares unwittingly from 2002 to 2008, and I���ve held them on purpose for another 14 years. Anthem closed at $28.73 on April 30, 2002���the first day I owned shares, or so I assume. It finished yesterday at $522.87 (symbol: ANTM). That���s a 1,720% return.
Still, let���s not overlook all the ways I lucked out here:
I���m lucky I got the shares at all. I certainly didn���t pick my own health insurance plan as a kid.
I���m lucky Anthem has done as well as it has. I could have received shares of a company that performed poorly.
I���m lucky I didn���t find out about the shares when I was in college. I absolutely would have blown the money.
I���m lucky that the ���missing money��� website I nonchalantly signed up for was legit and not part of some scam.
I���m lucky Anthem sent me a third letter about my unclaimed shares���with the eye-catching words ���potential forfeiture��� on the envelope.
I���m lucky that my Anthem shares have been held through a transfer agent and not in a brokerage account. That���s been enough of a barrier to keep me from selling.
Of course, I can also point to some errors. I never bothered to set up dividend reinvestment. The company started paying dividends in 2011, and those could have been reinvested. Had I done so, my investment would be worth even more.
It���s important to concede that luck will affect all of our investment results. We can certainly increase the odds of our success by stretching our investment timelines and by diversifying. But luck and timing will always play a role. For example, someone who invested in the S&P 500 for 20 years got a 104% return from December 1998 to December 2018���but a far larger 877% return from December 1980 to December 2000.
Further, it���s important not to confuse luck with skill. We all live and invest in times and circumstances that are unique to each of us. We can do all of the analysis we want. We can exercise as much prudence as we want. We can do all the ���right things.��� But there are always going to be circumstances beyond our control.
That���s not necessarily a bad thing. It just means that it���s important to have a financial plan that���s flexible enough to accommodate a bit of luck���good or bad.
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.
I own 126 shares of Anthem, a large health insurance company. I believe I got my shares on April 30, 2002. That���s when Anthem bought Trigon, a small insurer based in Virginia that my family used for health insurance.
In 1996, Trigon began the process of converting from a policyholder-owned company into a stockholder-owned company. It went public in 1997. Anyone who had a health insurance policy became a shareholder, including yours truly, who was age 14 at the time. In 2002, those Trigon shares were converted into Anthem shares.
I imagine Anthem sent me letters about my shares at some point, but I never received them. I was a sophomore in college, and my main concerns were studying, partying and downloading music on KaZaa (if you know, you know).
This was also a period of family upheaval. My grandmother, who raised me, had succumbed to dementia and was placed in a nursing home. My childhood home was sold, and there was a short window when I lacked a reliable mailing address.
By 2008, I had taken an interest in investing and started working at The Motley Fool. One day, a cousin suggested I enter my personal information into a ���lost money��� website. Crazy enough, the lost money thing worked. A couple of weeks later, Anthem sent me a letter. Dunce that I was, I looked at the envelope, thought it was an advertisement and promptly threw it in the trash. They sent me a second letter. I threw that one in the trash as well.
Finally, they sent me a letter with the words ���potential forfeiture��� on the envelope. I opened that one out of fear that I owed money. Imagine my surprise when I found out I was entitled to claim 126 shares of Anthem stock that were worth roughly $6,000. Anthem has soared since then, and it���s now one of my portfolio���s largest holdings.
When I���ve told this tale in the past, I���ve used it as an example of how buy-and-hold investing really can work. And it certainly has. I held Anthem shares unwittingly from 2002 to 2008, and I���ve held them on purpose for another 14 years. Anthem closed at $28.73 on April 30, 2002���the first day I owned shares, or so I assume. It finished yesterday at $522.87 (symbol: ANTM). That���s a 1,720% return.
Still, let���s not overlook all the ways I lucked out here:
I���m lucky I got the shares at all. I certainly didn���t pick my own health insurance plan as a kid.
I���m lucky Anthem has done as well as it has. I could have received shares of a company that performed poorly.
I���m lucky I didn���t find out about the shares when I was in college. I absolutely would have blown the money.
I���m lucky that the ���missing money��� website I nonchalantly signed up for was legit and not part of some scam.
I���m lucky Anthem sent me a third letter about my unclaimed shares���with the eye-catching words ���potential forfeiture��� on the envelope.
I���m lucky that my Anthem shares have been held through a transfer agent and not in a brokerage account. That���s been enough of a barrier to keep me from selling.
Of course, I can also point to some errors. I never bothered to set up dividend reinvestment. The company started paying dividends in 2011, and those could have been reinvested. Had I done so, my investment would be worth even more.
It���s important to concede that luck will affect all of our investment results. We can certainly increase the odds of our success by stretching our investment timelines and by diversifying. But luck and timing will always play a role. For example, someone who invested in the S&P 500 for 20 years got a 104% return from December 1998 to December 2018���but a far larger 877% return from December 1980 to December 2000.
Further, it���s important not to confuse luck with skill. We all live and invest in times and circumstances that are unique to each of us. We can do all of the analysis we want. We can exercise as much prudence as we want. We can do all the ���right things.��� But there are always going to be circumstances beyond our control.
That���s not necessarily a bad thing. It just means that it���s important to have a financial plan that���s flexible enough to accommodate a bit of luck���good or bad.
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.The post Treasure in the Trash appeared first on HumbleDollar.
April 21, 2022
Talking Money
APRIL IS FINANCIAL Literacy Month. If that doesn���t excite you, imagine how your children feel.
Still, consider this an opportunity to begin or reinforce your kids��� financial education. Many of my students told me one of their parents was into ���finance,��� but when I asked how the parent handled the family money, students would just shrug and say that was all they knew.
Children don���t like a straight-up lesson, especially from a parent. The trick is to make it seem casual and as blended into everyday life���theirs, not yours���as possible. Here are nine ideas for a wide range of ages, from elementary to high school. Choose the ones that fit your scion:
When shopping, compare two items, like two shirts with different prices. Ask your child why the more expensive shirt costs more. What do you get for the extra money���and is it worth it? Even better, have your child ask the sales clerk.
Ask your know-it-all tech-savvy child to help you set up some money management software. You can then have your child help you ���test��� the software with one of your child���s accounts, whether it���s a college fund, credit card or bank account. You might monitor the account together for a couple of months to see how the software works, and maybe have a conversation or two about financial issues along the way.
If you have a 529 or other college savings plan, include your child in monitoring its growth and how the balance compares to the current cost of college. Maybe have some strategy sessions on how to pay for college, which might involve looking at U.S. News & World Report's��list of best value schools.
Take a look at some mutual funds or individual stocks related to your child���s interests, which could be anything from fashion to sports to environmental sustainability. Make predictions about what will happen if, say, a new product is rolling out, and then check back a month later. Talk about why you were right or wrong, and what are good business strategies.
Put some creativity into a family budget challenge. Pick a family event, like a vacation or outing, and figure out how it can be done in a less-expensive fashion. Incentivize creativity by splitting the savings with your child, or using a part of it for an extra activity. Ice cream is good.
Delaying gratification is an important skill. Small children���s abilities can be tested���and then discussed with them���using the marshmallow��experiment. For older kids, have them set a goal of buying something they want later, say at the end of the year. Then promise to match a percentage of the money the child earns or saves toward the purchase. Make a thermometer chart to keep track.
If older children want money for something, ask them make a presentation, similar to a business seeking a grant. Have them lay out the costs and benefits of getting the money, and then question them about their presentation.
Budget a fixed amount for an event, anything from your child���s birthday to planning a ���night in Italy��� family dinner. Then have your child figure out how to allocate funds to make it the best experience. Whatever your child decides, that goes, assuming it fits within the budget. Don���t come to the rescue if your kid messes up.
Spending habits are formed from a lifetime of nudges, so help your children become savvy consumers of media. Watch media your children like, asking them to explain the nudges and overt demands of consumerism they see���from product placement, to banner ads scrolling below the video, to open solicitations. Point out the slyer methods of��persuasion or even make a hunt for them. Reassure your children that they���re too smart to fall for these tricks.
In the comment section below, feel free to suggest other activities. Do you include your child in buying decisions? Do you try to model smart spending? Responsible money habits aren���t something you tell your children about or, worse still, do for them. Instead, they���re built over time by the things you and your children do all year round and, most important, do together.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He's also authored several educational children's books. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.
Still, consider this an opportunity to begin or reinforce your kids��� financial education. Many of my students told me one of their parents was into ���finance,��� but when I asked how the parent handled the family money, students would just shrug and say that was all they knew.
Children don���t like a straight-up lesson, especially from a parent. The trick is to make it seem casual and as blended into everyday life���theirs, not yours���as possible. Here are nine ideas for a wide range of ages, from elementary to high school. Choose the ones that fit your scion:
When shopping, compare two items, like two shirts with different prices. Ask your child why the more expensive shirt costs more. What do you get for the extra money���and is it worth it? Even better, have your child ask the sales clerk.
Ask your know-it-all tech-savvy child to help you set up some money management software. You can then have your child help you ���test��� the software with one of your child���s accounts, whether it���s a college fund, credit card or bank account. You might monitor the account together for a couple of months to see how the software works, and maybe have a conversation or two about financial issues along the way.
If you have a 529 or other college savings plan, include your child in monitoring its growth and how the balance compares to the current cost of college. Maybe have some strategy sessions on how to pay for college, which might involve looking at U.S. News & World Report's��list of best value schools.
Take a look at some mutual funds or individual stocks related to your child���s interests, which could be anything from fashion to sports to environmental sustainability. Make predictions about what will happen if, say, a new product is rolling out, and then check back a month later. Talk about why you were right or wrong, and what are good business strategies.
Put some creativity into a family budget challenge. Pick a family event, like a vacation or outing, and figure out how it can be done in a less-expensive fashion. Incentivize creativity by splitting the savings with your child, or using a part of it for an extra activity. Ice cream is good.
Delaying gratification is an important skill. Small children���s abilities can be tested���and then discussed with them���using the marshmallow��experiment. For older kids, have them set a goal of buying something they want later, say at the end of the year. Then promise to match a percentage of the money the child earns or saves toward the purchase. Make a thermometer chart to keep track.
If older children want money for something, ask them make a presentation, similar to a business seeking a grant. Have them lay out the costs and benefits of getting the money, and then question them about their presentation.
Budget a fixed amount for an event, anything from your child���s birthday to planning a ���night in Italy��� family dinner. Then have your child figure out how to allocate funds to make it the best experience. Whatever your child decides, that goes, assuming it fits within the budget. Don���t come to the rescue if your kid messes up.
Spending habits are formed from a lifetime of nudges, so help your children become savvy consumers of media. Watch media your children like, asking them to explain the nudges and overt demands of consumerism they see���from product placement, to banner ads scrolling below the video, to open solicitations. Point out the slyer methods of��persuasion or even make a hunt for them. Reassure your children that they���re too smart to fall for these tricks.
In the comment section below, feel free to suggest other activities. Do you include your child in buying decisions? Do you try to model smart spending? Responsible money habits aren���t something you tell your children about or, worse still, do for them. Instead, they���re built over time by the things you and your children do all year round and, most important, do together.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. He's the author of a three-book series on how to teach elementary, middle and high school students about behavioral economics and media literacy. He's also authored several educational children's books. Jim lives in Texas with his wife and fellow HumbleDollar contributor, Jiab. Together, they're currently working on a book, ���Your Third Life: Reflections on Finding Our Way by Taking the Long Route.��� Check out Jim's earlier��articles.The post Talking Money appeared first on HumbleDollar.
Learned from the Best
MY KIDS THINK I���M cheap. I tell them, ���If I'm so cheap, why don't I have more money in the bank?"
I learned to be thrifty at the knees of my father and grandfather. During this time of high inflation, they provide me with examples to be emulated. Grandpa never owned a car and kept a vegetable garden into his 80s. He built a loom to weave small rugs made from rags, and then sold them to friends, family and neighbors. When he stopped making rugs, he put the loom into the wood burner to help heat the house.
He made much of what he needed and never wasted a thing. He built beautiful pieces of furniture, such as a blanket chest I still have, and a child���s roll-top desk that I used when I was growing up. His wife was equally thrifty and handy. She would fashion bowls from old popsicle sticks, crafted artificial flowers and sewed her own clothes.
Dad sought bargains and discounts on every major purchase. Until he and Mom started traveling, his only charge card was from Sears, where we purchased��appliances, tools and lawn equipment. He bought old houses in the city and converted them into apartments. He and his father were excellent carpenters. They remodeled half of our basement into a nightclub, including a large bar.
Dad used to brag that he rarely replaced the brakes on his vehicles. As soon as he saw a traffic light turning red, he took his foot off the gas and began to coast.
He changed after having a stroke at age 55. It caused enough minor issues that he had to retire from his union job at a factory. Soon, he sold the rental units. Recognizing his mortality, he started spending on expensive vacations, his beloved cottage and a mobile home in Miami.
Unfortunately, despite my thrifty ways and higher education, I won���t be buying any weekend or vacation places. But here are some of the ways I save money:
I���ve never paid extra for a vanity license plate promoting my alma maters or pet causes. Why should I give the state extra money to tell the world I���m a Nittany Lion or Florida Gator?
I always urged my kids to order water with restaurants meals, instead of soda, unless it was a special occasion.
When the soap in the dispenser runs low, I add water. It���s amazing how much more soap you���ll get.
I never buy extended warranties. Most appliances, computers and gadgets should last long enough without major repairs if I buy decent-quality items.
I buy lots of household items at dollar stores. The quality is on par with what I have purchased elsewhere, but the price is a lot less. A 12-pack of Angel Soft toilet paper from Amazon costs around $23. I could buy 76 rolls at Dollar Tree for the same amount.
I���ve never given money to my alma maters and probably never will. They���re public land-grant universities in large states and should have adequate funding. I have contributed to churches, political candidates and worthy charities, however.
In the 15 years that I���ve lived in my condo, I���ve never parked in my assigned spot. I use a visitor���s spot on the other side of the complex because it���s closer to the direction I turn to work. I save a little gas on each trip.
I won���t order takeout, have groceries delivered or buy meal prep services. They���re probably helpful for busy families, but I save money by cooking larger portions and then freezing the leftovers.
I���m no Scrooge. I���ve always supported my children in their interests and activities, and certainly in their schools and colleges. Growing up, they had plenty of books, games and videos. We didn���t take extravagant vacations, but I never said ���no��� to out-of-town camps or sports travel leagues. We paid for Scouts, voice lessons and individual coaching.
So, yes, I may be frugal���but I���m not cheap. I learned from the best.
Ron Wayne spent 26 years working for newspapers in Pennsylvania and Georgia before becoming the editor in the University of Florida���s main news office. During his 10 years working there, he earned his master���s degree in mass communication and taught as an adjunct in the College of Journalism and Communications. Since retiring last fall, he���s enjoyed a simple life, including reflecting on his experiences on
Medium.com
. Check out Ron's earlier articles.
I learned to be thrifty at the knees of my father and grandfather. During this time of high inflation, they provide me with examples to be emulated. Grandpa never owned a car and kept a vegetable garden into his 80s. He built a loom to weave small rugs made from rags, and then sold them to friends, family and neighbors. When he stopped making rugs, he put the loom into the wood burner to help heat the house.
He made much of what he needed and never wasted a thing. He built beautiful pieces of furniture, such as a blanket chest I still have, and a child���s roll-top desk that I used when I was growing up. His wife was equally thrifty and handy. She would fashion bowls from old popsicle sticks, crafted artificial flowers and sewed her own clothes.
Dad sought bargains and discounts on every major purchase. Until he and Mom started traveling, his only charge card was from Sears, where we purchased��appliances, tools and lawn equipment. He bought old houses in the city and converted them into apartments. He and his father were excellent carpenters. They remodeled half of our basement into a nightclub, including a large bar.
Dad used to brag that he rarely replaced the brakes on his vehicles. As soon as he saw a traffic light turning red, he took his foot off the gas and began to coast.
He changed after having a stroke at age 55. It caused enough minor issues that he had to retire from his union job at a factory. Soon, he sold the rental units. Recognizing his mortality, he started spending on expensive vacations, his beloved cottage and a mobile home in Miami.
Unfortunately, despite my thrifty ways and higher education, I won���t be buying any weekend or vacation places. But here are some of the ways I save money:
I���ve never paid extra for a vanity license plate promoting my alma maters or pet causes. Why should I give the state extra money to tell the world I���m a Nittany Lion or Florida Gator?
I always urged my kids to order water with restaurants meals, instead of soda, unless it was a special occasion.
When the soap in the dispenser runs low, I add water. It���s amazing how much more soap you���ll get.
I never buy extended warranties. Most appliances, computers and gadgets should last long enough without major repairs if I buy decent-quality items.
I buy lots of household items at dollar stores. The quality is on par with what I have purchased elsewhere, but the price is a lot less. A 12-pack of Angel Soft toilet paper from Amazon costs around $23. I could buy 76 rolls at Dollar Tree for the same amount.
I���ve never given money to my alma maters and probably never will. They���re public land-grant universities in large states and should have adequate funding. I have contributed to churches, political candidates and worthy charities, however.
In the 15 years that I���ve lived in my condo, I���ve never parked in my assigned spot. I use a visitor���s spot on the other side of the complex because it���s closer to the direction I turn to work. I save a little gas on each trip.
I won���t order takeout, have groceries delivered or buy meal prep services. They���re probably helpful for busy families, but I save money by cooking larger portions and then freezing the leftovers.
I���m no Scrooge. I���ve always supported my children in their interests and activities, and certainly in their schools and colleges. Growing up, they had plenty of books, games and videos. We didn���t take extravagant vacations, but I never said ���no��� to out-of-town camps or sports travel leagues. We paid for Scouts, voice lessons and individual coaching.
So, yes, I may be frugal���but I���m not cheap. I learned from the best.
Ron Wayne spent 26 years working for newspapers in Pennsylvania and Georgia before becoming the editor in the University of Florida���s main news office. During his 10 years working there, he earned his master���s degree in mass communication and taught as an adjunct in the College of Journalism and Communications. Since retiring last fall, he���s enjoyed a simple life, including reflecting on his experiences on
Medium.com
. Check out Ron's earlier articles.The post Learned from the Best appeared first on HumbleDollar.
April 20, 2022
My Favorite Ideas
WHAT ARE THE MOST important financial notions? For me, the answers are ���compounding��� and ���financial independence.���
Albert Einstein purportedly called compounding the eighth wonder of the world. Warren Buffett has said that the power of compound interest played an important role in his success. But what I���ve learned is that compounding doesn���t just apply to our finances. It can also be used to improve our health, our relationships and our mastery of whatever topic we choose.
Life reinvention is a slow process that happens in small steps that compound upon one another over time. You need to be patient and let the power of compounding work its magic. Do one positive thing each day, such as exercising, eating right or developing a new skill, that moves you toward who you want to be. If you do that one thing every single day, I promise that you���ll get there.
Meanwhile, I discovered the concept of financial independence���as opposed to the traditional notion of retirement���when I was in my mid-50s and struggling with whether or not to leave my stressful banking job. It was one of my biggest aha moments. I didn���t want to fully retire, but I wanted the financial freedom to do what I wanted when I wanted.
Realizing I had that freedom was life-changing for me. It gave me back my personal freedom���the freedom to be me���and allowed me to regain control over how I spend my time. I wasn���t scared about losing my job anymore. I could finally sleep at night knowing that, no matter what happened, my family and I would be okay.
We all have a fundamental need for security and safety. Gaining some degree of financial independence helps us meet those important needs. Achieving financial independence allows us to change our life���s direction. We can use that freedom as a stepping stone to a better life.
The post My Favorite Ideas appeared first on HumbleDollar.
April 19, 2022
A Tentful of Lessons
I WROTE AN ARTICLE last month about five financial lessons I learned at Ringling Bros. and Barnum & Bailey���s Clown College. But Clown College didn���t just offer financial lessons���it also offered valuable life lessons.
It was a topic I used to discuss with my students. For the last 16 years of my career, I taught college accounting courses. I encouraged the students to lead lives of reflection and learn from their experiences. I would share a short PowerPoint presentation, ���Top 10 Life Lessons from Clown College.��� I illustrated each lesson with pictures of clowns, acrobats or elephants. I hoped students would find it amusing. When I started teaching, I discovered���much to my surprise���that some students thought accounting was boring.
I always ended the presentation by telling students that, if I could draw 10 life lessons from Clown College, they could certainly draw 10 life lessons from their previous semester. Maybe students had learned that staying up all night cramming for an exam was a good way to study. Or maybe they had learned that pulling an all-nighter wasn���t such a good idea. They had probably learned something about teamwork, relationships, motivation and time management. By reflecting on our experiences, we have a better chance of benefiting from them. In that spirit, here are 10 life lessons I learned at Clown College.
1. We stand on the shoulders of giants. During its more than 130-year existence, Ringling Bros. named only four master clowns: Otto Griebling (born 1896), Lou Jacobs (1903), Bobby Kaye (1908) and Glen ���Frosty��� Little (1925). All four were early inductees into the International Clown Hall of Fame. The three younger ones were among the many instructors we had at Clown College when I attended in 1978. Clowns know that their work is much better when they���re taught by the best.
2. Appearances are important. A good, sturdy pair of all-leather, custom-made clown shoes costs at least $300. Professional clown wigs are handmade from yak hair. Clowns put a lot of time and effort into their costumes. Applying makeup often takes an hour. Good clowns spend the time and money to get everything right because they know that appearances are important.
3. The show must go on. The Flying Wallendas had a seven-person, three-high human pyramid walking a tight rope in Detroit in 1962 when the lead walker lost his balance and the pyramid collapsed. Two people fell to their death and a third was permanently paralyzed. All were family members. Karl Wallenda, the patriarch of the troupe, suffered several broken ribs. But the next day, he was back on the wire.
The nation���s greatest circus disaster was a fire in Hartford, Connecticut, on July 6, 1944. Flame-proof canvas was reserved for America���s World War II effort. To ensure it was water-proof, the Ringling tent had been coated with paraffin. When fire engulfed the big top, 167 people were killed. Five circus officials were criminally charged, and all profits for the next several years went to restitution. Yet, within days of the fire, the circus was again performing.
When we face adversity, we often need to follow the advice of the now-famous maxim, ���Keep calm and carry on.���
4. It���s important to have contingency plans. Ringling used Jeep-like vehicles to move animal cages and prop wagons. During intermission at one show, these vehicles were moved into a circle around the big-cat cage that started the second half of the show. Each vehicle faced the cage and had a driver ready to turn on its headlights. A clown asked the performance director the reason for this unusual arrangement. The director replied, ���Earlier today, this building lost power because of thunderstorms. Storms are still in the area. If we lose power again, I don���t want a performer in that cage in total darkness with all those animals.���
5. Almost anyone can master the basics. Decades ago, as an undergraduate, I taught juggling as a physical education class. As an accounting professor during the final years of my career, I also occasionally taught a phys ed juggling class. (My wife is quick to point out that I���d made absolutely no progress in 40 years.) I tell students that anyone can learn to juggle if they receive good instruction and they practice. I would provide the good instruction; they must provide the practice. The students did indeed learn to juggle.
6. To get good at something requires hard work. The first thing taught in juggling is the basic three-ball cascade. From there, a new juggler might learn to throw from different positions���under the opposing wrist, behind the back, under a leg. I enjoy juggling with a partner, exchanging balls at set times. A juggler can move on from balls to rings and clubs���even flaming clubs, something I can still do. All these skills require significant training and practice. Difficulty increases exponentially.
7. Pursue your dreams. Have long-term plans. I learned about Clown College while in high school when Ringling Bros. came to my hometown. Because I expressed interest, one of the clowns talked to me about Clown College and gave me an application. Seven years later, I was walking down the streets of New York City with a bag of juggling equipment in one hand and homemade stilts in the other, heading to an audition at Madison Square Garden.
8. Give credit where credit is due. In 1967, Irvin Feld bought Ringling Bros. and Barnum & Bailey���s Circus from descendants of the original Ringling family. The circus had only 14 clowns, most of them older than 50. Feld said he knew that Ringling clowns could fall down, but he didn���t know if they���d be able to get back up. Within a year, he opened Clown College. During its 30-year existence, Clown College trained 1,400 clowns. Thanks to Feld, American clowning was reinvigorated.
9. We have different strengths and abilities. At Clown College, some people seemed to be natural musicians, and they formed a clown band. Some had a knack for unicycling or stilt walking, while others struggled with both. Some exceled at juggling or pie-throwing, others did not. That���s okay. The circus needs all of these skills, just as the world needs people who have all sorts of strengths and abilities.
10. What unites us is greater than what divides us. The circus routinely had acts from at least a dozen countries. Since its beginning, people who identify as LGBTQ have been part of the circus. Little people were always welcome. Many years ago, most clowns were White males. But over the past 50 years, the circus has had many talented female and Black clowns. The question always asked of a performer has not been about race, ethnicity or sexual orientation, but rather, ���What can you bring to the show?���
Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey���s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles.
It was a topic I used to discuss with my students. For the last 16 years of my career, I taught college accounting courses. I encouraged the students to lead lives of reflection and learn from their experiences. I would share a short PowerPoint presentation, ���Top 10 Life Lessons from Clown College.��� I illustrated each lesson with pictures of clowns, acrobats or elephants. I hoped students would find it amusing. When I started teaching, I discovered���much to my surprise���that some students thought accounting was boring.
I always ended the presentation by telling students that, if I could draw 10 life lessons from Clown College, they could certainly draw 10 life lessons from their previous semester. Maybe students had learned that staying up all night cramming for an exam was a good way to study. Or maybe they had learned that pulling an all-nighter wasn���t such a good idea. They had probably learned something about teamwork, relationships, motivation and time management. By reflecting on our experiences, we have a better chance of benefiting from them. In that spirit, here are 10 life lessons I learned at Clown College.
1. We stand on the shoulders of giants. During its more than 130-year existence, Ringling Bros. named only four master clowns: Otto Griebling (born 1896), Lou Jacobs (1903), Bobby Kaye (1908) and Glen ���Frosty��� Little (1925). All four were early inductees into the International Clown Hall of Fame. The three younger ones were among the many instructors we had at Clown College when I attended in 1978. Clowns know that their work is much better when they���re taught by the best.
2. Appearances are important. A good, sturdy pair of all-leather, custom-made clown shoes costs at least $300. Professional clown wigs are handmade from yak hair. Clowns put a lot of time and effort into their costumes. Applying makeup often takes an hour. Good clowns spend the time and money to get everything right because they know that appearances are important.
3. The show must go on. The Flying Wallendas had a seven-person, three-high human pyramid walking a tight rope in Detroit in 1962 when the lead walker lost his balance and the pyramid collapsed. Two people fell to their death and a third was permanently paralyzed. All were family members. Karl Wallenda, the patriarch of the troupe, suffered several broken ribs. But the next day, he was back on the wire.
The nation���s greatest circus disaster was a fire in Hartford, Connecticut, on July 6, 1944. Flame-proof canvas was reserved for America���s World War II effort. To ensure it was water-proof, the Ringling tent had been coated with paraffin. When fire engulfed the big top, 167 people were killed. Five circus officials were criminally charged, and all profits for the next several years went to restitution. Yet, within days of the fire, the circus was again performing.
When we face adversity, we often need to follow the advice of the now-famous maxim, ���Keep calm and carry on.���
4. It���s important to have contingency plans. Ringling used Jeep-like vehicles to move animal cages and prop wagons. During intermission at one show, these vehicles were moved into a circle around the big-cat cage that started the second half of the show. Each vehicle faced the cage and had a driver ready to turn on its headlights. A clown asked the performance director the reason for this unusual arrangement. The director replied, ���Earlier today, this building lost power because of thunderstorms. Storms are still in the area. If we lose power again, I don���t want a performer in that cage in total darkness with all those animals.���
5. Almost anyone can master the basics. Decades ago, as an undergraduate, I taught juggling as a physical education class. As an accounting professor during the final years of my career, I also occasionally taught a phys ed juggling class. (My wife is quick to point out that I���d made absolutely no progress in 40 years.) I tell students that anyone can learn to juggle if they receive good instruction and they practice. I would provide the good instruction; they must provide the practice. The students did indeed learn to juggle.
6. To get good at something requires hard work. The first thing taught in juggling is the basic three-ball cascade. From there, a new juggler might learn to throw from different positions���under the opposing wrist, behind the back, under a leg. I enjoy juggling with a partner, exchanging balls at set times. A juggler can move on from balls to rings and clubs���even flaming clubs, something I can still do. All these skills require significant training and practice. Difficulty increases exponentially.
7. Pursue your dreams. Have long-term plans. I learned about Clown College while in high school when Ringling Bros. came to my hometown. Because I expressed interest, one of the clowns talked to me about Clown College and gave me an application. Seven years later, I was walking down the streets of New York City with a bag of juggling equipment in one hand and homemade stilts in the other, heading to an audition at Madison Square Garden.
8. Give credit where credit is due. In 1967, Irvin Feld bought Ringling Bros. and Barnum & Bailey���s Circus from descendants of the original Ringling family. The circus had only 14 clowns, most of them older than 50. Feld said he knew that Ringling clowns could fall down, but he didn���t know if they���d be able to get back up. Within a year, he opened Clown College. During its 30-year existence, Clown College trained 1,400 clowns. Thanks to Feld, American clowning was reinvigorated.
9. We have different strengths and abilities. At Clown College, some people seemed to be natural musicians, and they formed a clown band. Some had a knack for unicycling or stilt walking, while others struggled with both. Some exceled at juggling or pie-throwing, others did not. That���s okay. The circus needs all of these skills, just as the world needs people who have all sorts of strengths and abilities.
10. What unites us is greater than what divides us. The circus routinely had acts from at least a dozen countries. Since its beginning, people who identify as LGBTQ have been part of the circus. Little people were always welcome. Many years ago, most clowns were White males. But over the past 50 years, the circus has had many talented female and Black clowns. The question always asked of a performer has not been about race, ethnicity or sexual orientation, but rather, ���What can you bring to the show?���
Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey���s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry's earlier articles.The post A Tentful of Lessons appeared first on HumbleDollar.
Bad Old Days
I RECALL PAYDAY IN��1961, when I was at my first job. There was a paymaster who would deliver our paychecks. At break time, we would be off to the nearest bank to cash our checks. I deposited most of mine in a savings account, plus $2 in my Christmas Club account. But many of my fellow workers took the whole check in cash.
I always thought taking cash was a bit risky. I once got up the nerve to ask a few friends why they took cash. One told me that, once home, he placed the cash in envelopes designated for various bills and then paid those bills in cash.
Another friend said he didn���t want his wife to know how much he made. He gave her an allowance and kept the rest. This was especially important when overtime pay was involved. The extra cash was not, in his view, part of the family���s finances. I later realized this was a common attitude. Whatever the man earned was his��money. Remember, this was 61 years ago.
A few years later, the paymaster was gone and checks were mailed home. There was near panic in some parts of the company as workers scrambled to change the address where the checks were sent. Many designated their work address.
Those of us in employee benefits earned the ire of the unions when we decided to mail group term-life insurance certificates to each employee. It never occurred to me that not only did many spouses not know the amount of insurance in force, but also many didn���t know there was life insurance. The insurance was equal to one-and-a-half-times base annual pay. In a few instances, we created family strife when it was learned the spouse wasn���t the beneficiary.
This���what I call pure selfishness���extended beyond pay. Before the Employee Retirement Income Security Act (ERISA) of 1974, a worker had total control over his pension, married or not. To maximize his benefit, it was normal for workers to take a single-life annuity. But ERISA required that, if married, the pension would be paid as a joint-and-survivor annuity, unless the spouse waived her right. I welcomed that change not only because it was fair, but also I was tired of receiving calls from new widows looking for their pension and having to tell them there was none. ���But my George told me I would get everything I deserved��� carried a double meaning, alas.
In 1984, the Retirement Equity Act created the qualified domestic relations order (QDRO) and added a new wrinkle to the male-dominated ���it���s mine, I earned it��� attitude. Now, it was clear a spouse was entitled to a portion of the worker���s pension and other retirement income benefits���that they had earned the money together.
This change was a real shock to some workers and retirees. I received more than one threat from workers faced with the prospect of losing a portion of their pension to an ex-spouse. One older retiree showed up at the building with a gun when his pension was cut in half. He had ignored the QDRO that had been filed, and I had no choice but to enforce it.
Thankfully, those one-sided days of handling family income are long gone���I hope. Many of us, me included, dislike excessive government regulation. But there are times when society needs a push to do the right thing.
The post Bad Old Days appeared first on HumbleDollar.
How to Use I Bonds
WITH THE RELEASE of March���s Consumer Price Index, we now know that a risk-free investment yielding 9.6% will be available as of May 2. I���m speaking, of course, about Series I savings bonds from the U.S. Treasury, which have lately been all the rage. To take advantage, all you need to do is open an account at TreasuryDirect.gov. Last year, it took me all of 10 minutes to open my account.
I first wrote about I bonds back in October 2021. Since November of last year, these bonds have yielded just over 7.1%, which is pretty terrific for a risk-free investment. Unlike traditional bonds, which have been absolutely pummeled this year, Series I savings bonds are far safer���because you���re guaranteed to keep up with inflation and there���s no interest rate risk, meaning they don���t lose value as interest rates rise.
A unique window of opportunity exists this month. By purchasing I bonds in April, you can��lock in the current 7.1% interest rate for the next six months. After that, you���ll receive the new rate of 9.6% for the six months that follow. Because the interest earned on I bonds compounds every six months, your total return over the next 12 months will be 8.5%.
Thanks to these mouth-watering yields, there are some intriguing arbitrage opportunities available to investors. The strategies exploit the large difference in interest rate between I bonds and other investments. The most obvious opportunity: Buy an I bond with cash you have in bank accounts and money market mutual funds, assuming you don���t need to access that cash for at least one year. But here are five other strategies to consider:
1. Harvest tax losses among your bond funds.
Given the horrible drubbing bonds have undergone this year���and the worst may be yet to come���chances are good that you have sizable losses in many of your bond funds. If these bond funds are held in a taxable account, you can take advantage of tax-loss harvesting. By selling up to $10,000 of these bond funds and using the proceeds to purchase an I bond, you can use the capital loss to lower your 2022 tax bill while simultaneously reaping a guaranteed return of 8.5% over the next 12 months���assuming you buy in April.
2. Cash out of existing CDs and invest the proceeds in I bonds.
Selling certificates of deposits to buy an I bond makes great sense, even if it means paying a penalty for cashing out of your CD early. For example, if you have $5,000 in a 12-month CD with an interest rate of 1%, you���ll earn just $50 of interest. The same cash invested today in an I bond with a prospective yield of 8.5% would earn you $425 in interest, or $375 more. Even after paying any early withdrawal penalty on the CD, you���ll come out far ahead. Just keep in mind that I bonds can���t be sold until one year after the date of purchase.
3. Buy an I bond instead of prepaying your mortgage.
If you have a mortgage, chances are extremely good that your interest rate is well below 8%. The last time interest rates on 30-year fixed-rate mortgages were above 8% was in 2000. This presents an arbitrage opportunity for homeowners. If you can purchase I bonds yielding 8% or 9%, there���s no reason to pay down your mortgage early by making extra principal payments���at least not until you���ve invested the annual maximum in I bonds, which is $10,000 per individual, $20,000 for a married couple and $30,000 for a married couple with a trust. The interest you earn on that I bond will far exceed the interest you save by prepaying your mortgage.
The same logic applies to a home equity line of credit (HELOC). I���m generally opposed to using leverage, but it could make sense to borrow cash from your HELOC and then invest the money in an I bond. According to Bankrate.com, many HELOC rates are still below 4%. Should the interest rate on your HELOC rise above that of your I bond, simply sell the I bond and use the proceeds to pay down your home loan.
While this strategy requires some effort���including paying attention to interest rates���the payoff isn���t insignificant. If your HELOC has an interest rate of 3% and you earn 8.5% on I bonds over the next 12 months, you would come out ahead by $1,650 on a $30,000 I bond investment, and that���s just for one year.
4. Run the math on student loans.
The average interest rate on student loans, both federal and private, is 5.8%. The average is 4.12% for federal student loans. The math that applies to mortgages and HELOCs also applies to student loans. Given the juicy yields on I bonds, it may be worth making the minimum payment on your student loans and investing the rest in I bonds. Again, this strategy could be reversed should I bond interest rates fall below that of your student loans.
5. Consider building an I bond ���war chest��� for retirement.
If we���re entering a new era of higher inflation���say 4% to 5% per year���it may be worth raising an I bond war chest. Unless the purchase limit on I bonds is raised, building a substantial I bond portfolio will take time. But such a portfolio can have many benefits, particularly for retirees.
Inflation is one of the great risks for retirees, and the longer the retirement, the greater the risk. An annual inflation rate of 5% over 13 years, for example, would cut the dollar���s purchasing power almost in half. Stocks provide some degree of inflation protection, but at the cost of sequence-of-return risk. I bonds protect against both inflation and sequence risk. A sizable I bond portfolio could provide income during the pivotal years just before and after one retires, when sequence risk is at its highest. Also, a substantial I bond allocation could allow retirees to hold more stocks in the remainder of their portfolio without losing too much sleep. Furthermore, an I bond could serve as a ready source of liquidity for spending shocks during retirement.
How to go about building an I bond war chest? Say you���re married and 10 years from retirement. If you set up a trust, you could purchase $30,000 a year in I bonds over the next 10 years. With some tax planning, you could increase that limit to $35,000 a year, because an additional $5,000 in paper I bonds can be purchased each year with your tax refund.
That means that, all told, you and your spouse could purchase up to $350,000 in I bonds over the course of 10 years, confident that those dollars will maintain their inflation-adjusted value. Should you retire with stocks at all-time highs, you could hold onto your I bonds and sell stocks to generate income. But if stocks are in the dumps, you could begin liquidating your I bonds, giving your stock portfolio time to recover.
John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition.��Follow John on Twitter @JohnTLim��and check out his earlier articles.
I first wrote about I bonds back in October 2021. Since November of last year, these bonds have yielded just over 7.1%, which is pretty terrific for a risk-free investment. Unlike traditional bonds, which have been absolutely pummeled this year, Series I savings bonds are far safer���because you���re guaranteed to keep up with inflation and there���s no interest rate risk, meaning they don���t lose value as interest rates rise.
A unique window of opportunity exists this month. By purchasing I bonds in April, you can��lock in the current 7.1% interest rate for the next six months. After that, you���ll receive the new rate of 9.6% for the six months that follow. Because the interest earned on I bonds compounds every six months, your total return over the next 12 months will be 8.5%.
Thanks to these mouth-watering yields, there are some intriguing arbitrage opportunities available to investors. The strategies exploit the large difference in interest rate between I bonds and other investments. The most obvious opportunity: Buy an I bond with cash you have in bank accounts and money market mutual funds, assuming you don���t need to access that cash for at least one year. But here are five other strategies to consider:
1. Harvest tax losses among your bond funds.
Given the horrible drubbing bonds have undergone this year���and the worst may be yet to come���chances are good that you have sizable losses in many of your bond funds. If these bond funds are held in a taxable account, you can take advantage of tax-loss harvesting. By selling up to $10,000 of these bond funds and using the proceeds to purchase an I bond, you can use the capital loss to lower your 2022 tax bill while simultaneously reaping a guaranteed return of 8.5% over the next 12 months���assuming you buy in April.
2. Cash out of existing CDs and invest the proceeds in I bonds.
Selling certificates of deposits to buy an I bond makes great sense, even if it means paying a penalty for cashing out of your CD early. For example, if you have $5,000 in a 12-month CD with an interest rate of 1%, you���ll earn just $50 of interest. The same cash invested today in an I bond with a prospective yield of 8.5% would earn you $425 in interest, or $375 more. Even after paying any early withdrawal penalty on the CD, you���ll come out far ahead. Just keep in mind that I bonds can���t be sold until one year after the date of purchase.
3. Buy an I bond instead of prepaying your mortgage.
If you have a mortgage, chances are extremely good that your interest rate is well below 8%. The last time interest rates on 30-year fixed-rate mortgages were above 8% was in 2000. This presents an arbitrage opportunity for homeowners. If you can purchase I bonds yielding 8% or 9%, there���s no reason to pay down your mortgage early by making extra principal payments���at least not until you���ve invested the annual maximum in I bonds, which is $10,000 per individual, $20,000 for a married couple and $30,000 for a married couple with a trust. The interest you earn on that I bond will far exceed the interest you save by prepaying your mortgage.
The same logic applies to a home equity line of credit (HELOC). I���m generally opposed to using leverage, but it could make sense to borrow cash from your HELOC and then invest the money in an I bond. According to Bankrate.com, many HELOC rates are still below 4%. Should the interest rate on your HELOC rise above that of your I bond, simply sell the I bond and use the proceeds to pay down your home loan.
While this strategy requires some effort���including paying attention to interest rates���the payoff isn���t insignificant. If your HELOC has an interest rate of 3% and you earn 8.5% on I bonds over the next 12 months, you would come out ahead by $1,650 on a $30,000 I bond investment, and that���s just for one year.
4. Run the math on student loans.
The average interest rate on student loans, both federal and private, is 5.8%. The average is 4.12% for federal student loans. The math that applies to mortgages and HELOCs also applies to student loans. Given the juicy yields on I bonds, it may be worth making the minimum payment on your student loans and investing the rest in I bonds. Again, this strategy could be reversed should I bond interest rates fall below that of your student loans.
5. Consider building an I bond ���war chest��� for retirement.
If we���re entering a new era of higher inflation���say 4% to 5% per year���it may be worth raising an I bond war chest. Unless the purchase limit on I bonds is raised, building a substantial I bond portfolio will take time. But such a portfolio can have many benefits, particularly for retirees.
Inflation is one of the great risks for retirees, and the longer the retirement, the greater the risk. An annual inflation rate of 5% over 13 years, for example, would cut the dollar���s purchasing power almost in half. Stocks provide some degree of inflation protection, but at the cost of sequence-of-return risk. I bonds protect against both inflation and sequence risk. A sizable I bond portfolio could provide income during the pivotal years just before and after one retires, when sequence risk is at its highest. Also, a substantial I bond allocation could allow retirees to hold more stocks in the remainder of their portfolio without losing too much sleep. Furthermore, an I bond could serve as a ready source of liquidity for spending shocks during retirement.
How to go about building an I bond war chest? Say you���re married and 10 years from retirement. If you set up a trust, you could purchase $30,000 a year in I bonds over the next 10 years. With some tax planning, you could increase that limit to $35,000 a year, because an additional $5,000 in paper I bonds can be purchased each year with your tax refund.
That means that, all told, you and your spouse could purchase up to $350,000 in I bonds over the course of 10 years, confident that those dollars will maintain their inflation-adjusted value. Should you retire with stocks at all-time highs, you could hold onto your I bonds and sell stocks to generate income. But if stocks are in the dumps, you could begin liquidating your I bonds, giving your stock portfolio time to recover.
John Lim is a physician and author of "How to Raise Your Child's Financial IQ," which is available as both a free PDF and a Kindle edition.��Follow John on Twitter @JohnTLim��and check out his earlier articles.The post How to Use I Bonds appeared first on HumbleDollar.
April 18, 2022
Generosity Delayed
I MENTIONED IN a recent article that my wife sold her home. We thought we���d leave a legacy to her son by investing the money in the stock market and letting it compound over many decades. That way, when he retires, it would help him reach financial independence.
But my wife doesn���t want my stepson to know about the money we���re investing for him���and he won���t find out from this blog post because he���s not a HumbleDollar reader. She���s afraid he might not work as hard to get ahead if he knows he'll inherit a large chunk of money.
He currently lives a modest lifestyle. He shares a rental house with other roommates and still drives the used car his mother gave him when he graduated college. He���s a lawyer who is living below his means and saving for a house down payment. My wife likes that and doesn't want to do anything that might change his financial behavior.
He doesn���t know how much money we have. We never discuss our finances with him. Since we���re currently in good health, we don���t think it���s necessary. But when the time comes, I think he���ll be surprised. A lot of our wealth came later in life, thanks to the miracle of compounding.
We also live well below our means. We drive a 2020 Honda Civic and a 2007 Honda Fit. The latter has more than 200,000 miles on it. We don���t subscribe to cable television. My wife rarely wears jewelry other than her wedding ring. She likes nice clothes, but she���s always looking for a sale. Our house is in a desirable neighborhood, but modest in size.
We see the��lavish lifestyle of our friends��� daughter. She and her husband live in a luxury apartment complex in an expensive beach community. The complex has a concierge and gym. Our friends complain about their daughter and son-in-law spending all that money on an apartment when they could be saving for a house.
We suspect that our friends��� wealth might be one of the reasons for their daughter���s free spending. Maybe their daughter isn't saving for her future because she knows her parents will leave her a large inheritance.
My wife wants to help her son financially, but not right now. She wants him to make a life of his own without our help. She thinks it���ll make him a better person and he will appreciate what he has more. I have no doubt my stepson is hard working and financially responsible, but maybe this isn���t the best time to tell him about the money we���re investing for his future.
But my wife doesn���t want my stepson to know about the money we���re investing for him���and he won���t find out from this blog post because he���s not a HumbleDollar reader. She���s afraid he might not work as hard to get ahead if he knows he'll inherit a large chunk of money.
He currently lives a modest lifestyle. He shares a rental house with other roommates and still drives the used car his mother gave him when he graduated college. He���s a lawyer who is living below his means and saving for a house down payment. My wife likes that and doesn't want to do anything that might change his financial behavior.
He doesn���t know how much money we have. We never discuss our finances with him. Since we���re currently in good health, we don���t think it���s necessary. But when the time comes, I think he���ll be surprised. A lot of our wealth came later in life, thanks to the miracle of compounding.
We also live well below our means. We drive a 2020 Honda Civic and a 2007 Honda Fit. The latter has more than 200,000 miles on it. We don���t subscribe to cable television. My wife rarely wears jewelry other than her wedding ring. She likes nice clothes, but she���s always looking for a sale. Our house is in a desirable neighborhood, but modest in size.
We see the��lavish lifestyle of our friends��� daughter. She and her husband live in a luxury apartment complex in an expensive beach community. The complex has a concierge and gym. Our friends complain about their daughter and son-in-law spending all that money on an apartment when they could be saving for a house.
We suspect that our friends��� wealth might be one of the reasons for their daughter���s free spending. Maybe their daughter isn't saving for her future because she knows her parents will leave her a large inheritance.
My wife wants to help her son financially, but not right now. She wants him to make a life of his own without our help. She thinks it���ll make him a better person and he will appreciate what he has more. I have no doubt my stepson is hard working and financially responsible, but maybe this isn���t the best time to tell him about the money we���re investing for his future.
The post Generosity Delayed appeared first on HumbleDollar.
Life on the Margins
THIS IS MY FOURTH year serving in AARP Foundation���s TaxAide��program. I prepare federal and state tax returns three days a week for a mixture of retirees and lower-income citizens.
Each week, I see clients who are baffled by the complexity of our tax code. Many have been paying hundreds of dollars to commercial preparers because they���re afraid of making a mistake.
And no wonder. The federal tax code has myriad twists and turns that can confound the average taxpayer. Phaseout ranges and tax cliffs are common, so even a small increase in income can trigger a tax that folks weren���t expecting or prevent them from obtaining a credit or deduction that they thought they���d qualify for.
The Tax Policy Center has a useful article describing common phaseouts and their tendency to raise taxes on higher incomes. It groups phaseouts into three categories: family benefits, education and retirement savings. Within the first group are the widely used earned income tax credit, child tax credit, and child and dependent care credit.
With a phaseout, a tax benefit tends to get whittled away in stages as income rises. But some phaseouts are more like cliffs���the benefit disappears in big chunks as a result of a relatively small change in income. One example of a cliff is Medicare���s income-related monthly adjustment amount, or IRMAA.
In 2022, the premium for Medicare Part B insurance is $170.10 per month for a single filer with a modified adjusted gross income of $91,000 or less. With just $1 more of income, however, the premium jumps to $238.10 a month. That single dollar of extra income could cost a Medicare recipient $816 in 2022.
The severity of a cliff is often measured by its marginal tax rate, which is the tax rate on the last additional dollar of income. Continuing our IRMAA example, that $1 more in earnings could create a marginal tax rate of 81,600%. It may sound absurd, but you can find examples like this throughout the tax code.
As a new resident of New Jersey, I���ve been introduced to one of the steepest cliffs I���ve ever seen. New Jersey doesn���t tax Social Security or military pensions. But other retirement income���pensions, annuities and IRA withdrawals���can be taxed depending on income. For married filers, if your total income is $100,000 or less, none of your retirement income gets taxed by the state. Earn $1 more, though, and half that retirement income is subject to a state tax, potentially costing married filers $805. At $150,001 and above, 100% of joint filers��� allowable retirement income is taxable, potentially costing them an additional $2,072 in taxes and bringing their total tax bill to $5,512. At that level, that extra $1 in income has an incredible marginal tax rate of 207,200%.
Now, I understand that marginal tax rates need to be taken with a grain of salt. The effective tax rate represents a more realistic view of the burden that a New Jersey taxpayer shoulders. At a total income of $150,001, the effective state tax rate is still less than 4%.
Lest readers think I���m a tax crank, I understand that paying taxes is an important part of our civic duty. My wife and I are scrupulously honest in our tax filings and faithfully pay our taxes.
But I���ve also seen firsthand how the expenses of retirees can increase sharply, especially if they have a medical issue. Proper tax planning can prolong the life of a retiree���s savings by years. But it requires taking the time to understand the intricacies of the tax code���a tall order for many���or finding competent help from a paid or volunteer tax preparer.
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.
Each week, I see clients who are baffled by the complexity of our tax code. Many have been paying hundreds of dollars to commercial preparers because they���re afraid of making a mistake.
And no wonder. The federal tax code has myriad twists and turns that can confound the average taxpayer. Phaseout ranges and tax cliffs are common, so even a small increase in income can trigger a tax that folks weren���t expecting or prevent them from obtaining a credit or deduction that they thought they���d qualify for.
The Tax Policy Center has a useful article describing common phaseouts and their tendency to raise taxes on higher incomes. It groups phaseouts into three categories: family benefits, education and retirement savings. Within the first group are the widely used earned income tax credit, child tax credit, and child and dependent care credit.
With a phaseout, a tax benefit tends to get whittled away in stages as income rises. But some phaseouts are more like cliffs���the benefit disappears in big chunks as a result of a relatively small change in income. One example of a cliff is Medicare���s income-related monthly adjustment amount, or IRMAA.
In 2022, the premium for Medicare Part B insurance is $170.10 per month for a single filer with a modified adjusted gross income of $91,000 or less. With just $1 more of income, however, the premium jumps to $238.10 a month. That single dollar of extra income could cost a Medicare recipient $816 in 2022.
The severity of a cliff is often measured by its marginal tax rate, which is the tax rate on the last additional dollar of income. Continuing our IRMAA example, that $1 more in earnings could create a marginal tax rate of 81,600%. It may sound absurd, but you can find examples like this throughout the tax code.
As a new resident of New Jersey, I���ve been introduced to one of the steepest cliffs I���ve ever seen. New Jersey doesn���t tax Social Security or military pensions. But other retirement income���pensions, annuities and IRA withdrawals���can be taxed depending on income. For married filers, if your total income is $100,000 or less, none of your retirement income gets taxed by the state. Earn $1 more, though, and half that retirement income is subject to a state tax, potentially costing married filers $805. At $150,001 and above, 100% of joint filers��� allowable retirement income is taxable, potentially costing them an additional $2,072 in taxes and bringing their total tax bill to $5,512. At that level, that extra $1 in income has an incredible marginal tax rate of 207,200%.
Now, I understand that marginal tax rates need to be taken with a grain of salt. The effective tax rate represents a more realistic view of the burden that a New Jersey taxpayer shoulders. At a total income of $150,001, the effective state tax rate is still less than 4%.
Lest readers think I���m a tax crank, I understand that paying taxes is an important part of our civic duty. My wife and I are scrupulously honest in our tax filings and faithfully pay our taxes.
But I���ve also seen firsthand how the expenses of retirees can increase sharply, especially if they have a medical issue. Proper tax planning can prolong the life of a retiree���s savings by years. But it requires taking the time to understand the intricacies of the tax code���a tall order for many���or finding competent help from a paid or volunteer tax preparer.
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.The post Life on the Margins appeared first on HumbleDollar.
