Jonathan Clements's Blog, page 269
September 1, 2021
Lounging About
On that score, Spirit Airlines has recently made headlines. I���ve also personally endured last-minute cancellations by British Airways and American Airlines. Even when you finally board a flight, many domestic airlines have suspended serving alcoholic beverages, except to first-class passengers. It���s due to drunken belligerence and mask-protesting confrontations in aircraft cabins.
Want to fly? I have one recommendation: Sign up for a credit card that permits entry into an airport lounge. Recently, I flew from Dallas to Denver to Las Vegas. All three airports had lounges that served complimentary meals and drinks. While leaving the Las Vegas hotel in an Uber, American Airlines texted me that my morning flight was canceled. I knew that I could access the airport lounge to relax and eat���even take a shower���while I waited for the airline to reschedule my flight home.
After I got home, I did some research on what my credit card cost me. After deducting the card���s annual fee from the statement credits that I earn, I was pleasantly surprised. My credit card gives me statement credits for travel, hotels, brokerage account balances, Uber, streaming services, Home Depot spending and Best Buy purchases. The upshot: The credit card that provided me access to the airport lounge was not a cost to me at all. Rather, it provides a net profit of a few hundred dollars a year.
It���s possible that some of these perks will disappear once more flyers return to the skies. But for now, the welcoming airport lounge has been well worth its non-cost to me.
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August’s Hits
"Hooking up a railcar in subzero temperatures isn���t something I���ll be doing if I can supplement my savings with Social Security," says Juan Fourneau, explaining why he'll likely claim benefits at age 62.
Suppose you're married and one of you dies. What now? James McGlynn lists 10 key financial issues to keep in mind.
"I���m hesitant to say the experts are wrong about how much you need for emergencies," says Bill Ehart. "They suggest having three-to-six months��� worth of��fixed expenses saved up. But they���re wrong."
The data tell us that most actively managed funds underperform competing index funds���and yet many folks still buy active funds. Why? Adam Grossman lists seven possible reasons.
Are you married or once were? Adam Grossman details 10 things you need to know about Social Security spousal benefits.
Adam Grossman is skeptical of financial planning rules of thumb. Still, he thinks they���re useful for five key questions.
One of Dennis Friedman's retired friends has half his money in stocks���and the other half in income annuities. A smart strategy? Dennis ponders the plusses and minuses.
What about blog posts? The best read pieces were Dennis Friedman on six key numbers, Don Southworth on financial buckets, Mike Drak on a fulfilling retirement, Dick Quinn on his 12 commandments��and Dennis Friedman on staying put.
Meanwhile, the two most popular weekly newsletters were Senior Class and Cooling Off. What about Voices questions? Readers were especially intrigued by the issues of how we define enough and what three funds��investors should purchase.
HumbleDollar has always seen a healthy readership for articles that were published months and sometimes years ago. That was true once again in August, with readers flocking to Terms of the Trade, Go to Extremes and��12 Deadly Sins.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier��articles.The post August’s Hits appeared first on HumbleDollar.
August 31, 2021
New and Improved
THE KITCHEN REMODEL is complete. It���s so new that we���re still trying to remember where we put the can opener. Truth be told, we haven���t quite learned how to work all the appliances, either.
Ready or not, our remodeled kitchen was recently put to the test by the visit of two of our children���s families���including five teenagers. There were ongoing warnings like ���be careful how you close that drawer��� and ���don���t put that there, it will stain.��� Happily, the kitchen survived. But only barely, according to my wife.
One outstanding issue: What would make an appropriate door between the kitchen and laundry room? We���re debating the issue. There is the door my wife envisions���and then there���s my idea of a door at a reasonable cost. It���s just a door, after all. I wish.
That isn���t the only surprise expense. A new kitchen makes the rest of the house look worn. The solution was to repaint everything. The woodwork and doors, last stained in the 1980s, were all painted white. ���Watch the woodwork, it will chip if you hit it,��� was heard frequently this summer. It turned out to cost $10,400 to update our look to 2021. I sure hope that white stays the ���in��� color.
In the fall, we will move the remodeling show outdoors. We plan to have the trim painted, the front stained, damaged facia boards replaced and new gutters hung. The price? To be determined. Then there are two bathrooms to be made new again, starting next January.
Why would a couple with an average age of 80 want to live in a construction zone? My wife says she wants the house up to snuff for the kids. I say��� actually, I don���t say much.
How are we paying for all this? I never commit to spending before I know where the money is coming from. That���s true in this case, too. Since our ability to travel was restricted by COVID-19, we have unspent money in our travel fund. The fund was bolstered by the refund from our 2020 cruise disaster. We used to dedicate our Social Security payments to travel. Not these last 18 months. They���ve gone for remodeling, too. Then I���ve relented and stopped reinvesting some dividends. You guessed it���remodeling as well. Thinking ahead, I imagine my 2021 required minimum distributions will also be paying for those two new bathrooms.
Money well spent? You���ll need to ask my kids. Logical spending? To be determined.
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On the House
In 1992, when my oldest was 10 years old, we moved to a new home. We opted for a 15-year mortgage at 7.625% with 33% down. With our son���s graduation set for 2000, we began to prepay the mortgage so the last payment would coincide with the month before he began his freshman year. Thereafter, the payments previously sent to the mortgage company were instead directed to the college.
Our aggressive repayment plan was made possible by buying enough house for our needs but less than we could afford. On top of that, the large down payment ensured that the required monthly payments were relatively low.
Financial planners might say a better strategy would be to take out a 30-year mortgage with, say, a 10% down payment and then pay only the minimum required. The notion: You could take the money that isn���t going to the mortgage company���the difference between the 30-year loan���s smaller down payment plus lower monthly payments and the 15-year mortgage���s larger down payment and higher monthly payments���and instead invest in the stock market.
As it turns out, I was able to make a direct comparison of the two approaches. We had money provided by a grandparent for our son���s college, which was invested in a stock mutual fund. For most of the 1990s, it looked like a great strategy. Then the dot-com bubble burst and a big chunk of the fund gains were erased just as college was starting. Meanwhile, the money prepaid on the mortgage effectively earned 7.625% a year. What are the lessons here?
With a long time horizon, mortgage prepayments aren���t that burdensome. Imagine a family buying a home with a 30-year mortgage when their first child is born. Small prepayments early on, which then increase annually as the family���s income rises, might pay off the mortgage by the time the child turns 18.
An added bonus of prepayments: You build home equity that can then be tapped through a credit line to help pay for college.
Unlike 529 college savings plans, home equity can be used for any purpose, plus it shouldn���t affect financial aid eligibility.
Leaving college money in the stock market as my son neared high school graduation was a mistake. Fortunately, we didn���t lose money overall, though we ended up with zero growth for the years involved.
Low mortgage rates today make prepayments less attractive. Still, mortgage prepayments have a 100% predictable return, while stock returns are 100% unpredictable. Indeed, with the stock market averages at record highs, there���s an increased risk that future returns won���t match recent years.
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Learning by Going
SINCE FIRST venturing outside the U.S. 14 years ago, I���ve come to realize the tremendous value that travel offers.
I began writing this article in Buenos Aires 18 months ago, shortly before a cruise around South America. We sailed on March 6, 2020���and it didn't turn out��so well. But I���m not deterred. As Mark Twain observed, "Travel is fatal to prejudice, bigotry, and narrow-mindedness, and many of our people need it sorely on these accounts.��� I second that.
I once asked a wealthy man his favorite place in Europe. ���Never been out of the country and have no interest in doing so��� was the curt reply. I was shocked. Had he any idea how good he had it? He isn���t alone. Forty��percent of Americans say they have never been outside the U.S. And, no, a week in Cabo or the islands doesn���t count.
Can Americans appreciate our standard of living until they experience life in other countries? We have lower taxes than most European countries, but we can���t save because our lifestyle often exceeds our means. I���m guessing most Americans think a VAT is a large tub. The U.S. median��income is above all but one tiny European country, not to mention several times the world average.
We like to compare our health care system and medical spending with other countries, but fail to consider we���re the developed world���s most obese country. Try giving an American a sandwich with one slice of ham, as is typical in Europe.
Russia, the Ukraine and the old Eastern European countries highlight the differences. I spent three weeks in Russia traveling by river from St. Petersburg to Moscow. Along the way, we stopped in villages which seemed unchanged since the 19th century. We visited the home of a widow living on a pension of $150 a month, half of which went to rent. Her bed���a cot���was in what I���ll describe as a closet off the tiny kitchen. The median household income in Russia is $11,724, roughly a sixth of that in the U.S. And yet, in Moscow, Mercedes and BMWs are parked on the sidewalks.
In the Ukraine, I asked a young bartender what her dream income would be. She replied $1,000 a month. That isn���t even equal to our minimum wage.
Most Europeans make do with far less than what many Americans consider necessities. There are smaller homes, smaller cars and fewer possessions, and yet they���re just as happy, maybe more so. I was amazed at the parking garages in Amsterdam with a 20,000 capacity���for bikes that is.
There are an estimated 2,391 self-storage facilities in all of Europe, or about 75 million square feet of storage space. That compares with more than 52,000 U.S. facilities offering 236 million square feet. We are the United Stuff of America.
How about individual savings rates? Isn���t it curious that Europeans generally earn less, pay higher taxes and yet save more than Americans?
Outside the U.S., the view of life and government is different. In Spain, I visited a horse farm and learned it was once confiscated by the Franco government. Our guide showed us his government-issued health insurance card and explained how it was all he needed to get ���free��� care, but also noted that the government assigned doctors and a hospital. Still, he was happy.
In Israel, a Palestinian woman described how her family home was taken and given to others.
A woman in Buenos Aries explained what it was like living with uncontrolled inflation, a fear of banks and why she welcomed U.S. dollars, which she hid in her home. Meanwhile, Americans holler if their Social Security cost-of-living adjustment isn���t as large as expected.
In Morocco, I rode a camel. The owner wanted a bigger tip. I think it ended up at about 25 cents. He was happy.
Look at the ads for Caribbean resorts and they show paradise. Yeah, not so much. Travel beyond the gates of your resort and what you see is extreme poverty. Costa Rica is beautiful, but it depends on where you���re looking.
I���ve been chastised in Europe for tipping. Typically, tipping isn���t expected because wages are sufficient. I admit I don���t get the different prices charged by restaurants based on where you sit. In Italy, I ordered a cup of coffee and then sat at a table outside. Yikes, did that ever rile up the server. It costs extra to sit.
I cruised on the QE2 once and had several enjoyable hours chatting with Europeans as we discussed issues in our countries. Then we had dinner with several American couples and tolerated their bragging about stuff, planned next cruise and their generally materialistic attitude.
Many Americans are isolated from the world around them and thus have a limited perspective on living standards, taxes and government. Travel outside the U.S. provides a valuable education���and an antidote to our less endearing traits.
Richard Quinn blogs at QuinnsCommentary.net. Before retiring in 2010, Dick was a compensation and benefits executive.��Follow him on Twitter��@QuinnsComments��and check out his earlier��articles.
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August 30, 2021
Running the Numbers
But it was a casual comment that Thaler made toward the end of the interview that really caught my attention. Podcast host Meb Faber asked him for some best practices for teaching personal finance to high school students. Thaler suggested replacing subjects like trigonometry���with near zero practical value���with more useful ones, such as teaching students how to use a spreadsheet.
Use a spreadsheet. It suddenly dawned on me just how heavily I���ve relied on spreadsheets throughout my life, particularly when it comes to personal finance. So many financial questions are ripe for analysis through the use of spreadsheets. The following is a list of nine problems for which I���ve depended on them. Some of the resulting spreadsheets were relatively simple, while others devilishly complex.
Creating a budget.
Seeing how different savings rates would lead to differing levels of wealth accumulation.
Estimating my cumulative savings by refinancing or prepaying a mortgage. (This was before online mortgage calculators became ubiquitous.)
Determining whether and how much to contribute to my employer���s cash balance plan���a type of defined benefit��pension plan. This was a truly complex problem given the myriad factors involved.
Helping to choose between health insurance plans, including some that were compatible with health savings accounts and others that weren���t.
Setting buying thresholds in 2020���s bear market based on a ���worst-case scenario��� analysis, as detailed in an article early last year.
Analyzing and rebalancing my investment portfolio.
Creating a savings rate calculator for a talk I gave on financial independence. The primary input was ���years to financial independence������there were, of course, other inputs as well���and the output was the ���required savings rate.���
Calculating the yield to maturity on bonds.
Looking for help creating a spreadsheet? Microsoft offers a slew of Excel templates that are available for download.
Many of my HumbleDollar articles���and the financial analyses that underlay them���would never have seen the light of day if it weren���t for spreadsheets. Of the 24 articles and blog posts that I���ve written so far, a full quarter of them relied on spreadsheets in some manner. In particular, this article, this one and this one were essentially spreadsheets disguised as prose. These articles also happen to be among my favorites.
How often have I used trigonometry in my finances? Meet the null set.
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The Kindest Cut
The Bureau of Labor Statistics recently reported that overall consumer prices have climbed 5.4% over the prior 12 months. If inflation is here to stay, retirees like me need to figure out the best way to protect our investment portfolio.
A Vanguard Group article showed that making changes to a well-diversified portfolio is probably not the best way to protect yourself from higher inflation. For instance, adding Treasury Inflation-Protected Securities provides only a limited hedge against inflation because it offers little protection for the rest of your portfolio. Commodities are not a good fit because of their high volatility, plus they suffered spells of underperformance during previous periods of higher inflation.
The Vanguard study concluded that making small reductions in spending will likely be more beneficial than adjustments to your investment portfolio. Even small spending cuts during times of uncertainty can increase the chances you won���t run out of money. The upshot: We decided to postpone our SUV purchase for now.
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College or Plan B?
Students and their parents are led to believe that everyone is taking a college prep curriculum in high school. There are indeed students who are actually preparing for college. Then there are many more students who think they���re preparing for college, although they have little chance of succeeding there.
The statistics are bleak. Getting into college is relatively easy. It���s much harder to earn a degree in four years in a field that has good job prospects. Fully 40% of students entering a four-year college fail to graduate within six years. Half of those who do graduate never use their college major in their careers. Both groups risk running up so much student debt that it hobbles their start in life.
In most areas of lending, the borrower is expected to put up collateral. Not so with student loans. It���s hard not to qualify. The collateral being offered is the student���s future earnings���an intangible. It���s left to the borrower, not the bank, to determine if that���s a good risk. What are the student���s prospects of graduating? In how many years? With what major? Unfortunately, many families never answer these questions before borrowing, only to discover later that they can���t repay their loans on time.
College isn���t for everyone, but teenagers often tell adults what they want to hear. ���Are you planning to go to college?��� Kids can sense that the desired answer is, ���Yes.��� Parents should take a more active role in gauging their children���s career prospects.
It begins in elementary school when students are asked, ���What do you want to be when you grow up?��� The answers begin at the fantasy level: ���I want to be an astronaut��� or ���I want to be a professional baseball player.��� By middle school, students should be exposed to a variety of possible careers, and discuss what those jobs entail and how to prepare. Early in high school, students should broadly identify their interests. ���I want to work with people��� is a good insight. So is, ���I am better with my hands than I am in English class.���
The transition to high school coursework signals whether a child is college material. Does the student excel in the key academic subjects of freshman math and English? Grades in high school are the best predictor of grades in college.
Tenth grade is the turning point. Are students enjoying and demonstrating an aptitude for academic subjects? Have they explored career options and identified goals that require a college education? Do they read for pleasure���and I mean something other than their cellphone screen? How strong is their performance on standardized tests versus their peers?
If grades, test scores and personal insights indicate a student might not succeed in college, it���s time for a plan B. Career prep work should accelerate, focusing on job shadowing and part-time work. Just having a high school diploma doesn���t count for much. Certificates, test-based credentials, military training, skilled-trade apprenticeships, on-the-job training and associate degrees are all good preparation for a career.
For the college-bound, 11th and 12th grade should bring increasingly specific career preparation activities. Do students have a goal for college? Are they using work or volunteer hours to refine their career choice? Can they read and comprehend 200 pages of challenging material a week? Eleventh grade is also the year for the PSAT, the preliminary standard aptitude test. College-bound students should score well above the minimum required for college entrance. Advanced placement courses and college courses offered through the high school can demonstrate if they���re capable of college-level material.
Then there are intangible factors to assess, including maturity, grit and goals. A goal-oriented student who has the maturity and persistence to overcome a lack of academic preparation may be a better bet than the academically solid high-schooler who lacks goals or the maturity to succeed.
As I���ve discussed my ideas with others, I get pushback. I hear stories of students who struggled in high school and went on to be a success in college and beyond. The opposite occurs, too. A student who is expected to be a college success drops out instead. Judging anecdotal examples is difficult. You have to weigh the odds. If the odds are stacked against college success, create a plan B for your child. The savings in time���and money���can pave the way for a solid economic future.
Howard Rohleder, a former chief executive of a community hospital, retired early after more than 30 years in hospital administration. His previous articles were��Helping Mom and Dad��and After the Birth. In retirement, Howard enjoys serving on several nonprofit boards, exploring walking paths with his wife Susan, and visiting their six grandchildren. A little-known fact: In May 1994, he was featured���along with five others���on the cover of Kiplinger���s Personal Finance for an article titled ���Secrets of My Investment Success.���The post College or Plan B? appeared first on HumbleDollar.
August 29, 2021
Hotels Over Coffee
After some deliberation, however, I���m going to focus instead on amassing travel rewards points. For the past five years, I���ve used the Marriott Rewards credit card, which gives me at least one hotel point for each dollar I spend. The key reason I like this card: With my spending, I���m effectively forcing myself to save for a vacation. While a daily Starbucks coffee would be nice, I can see this reward getting old after a few weeks. I treat myself to Starbucks once or twice per week. A daily dose may be too much. I view it as more prudent to save for a big experience a few times each year rather than focus on getting my daily coffee comped.
Another solid feature of the Marriott card: The effective rewards rate compares well to the teaser rates advertised by cash-back cards. Based on our spending level, I place the value for the free nights we earn at about 1.7% of our total spending. While that���s lower than the 2% that Katie Ledecky was advertising during the Olympics, we have a lot more fun with our free hotel nights than we���d get from a periodic credit on our billing statement.
An additional benefit I���ve been impressed by���and one not to be taken lightly when evaluating cards���is that it���s been easy to use our hotel points. The rewards points post soon after the dollars are spent, and we���ve never had an issue getting a Marriott reservation at the time or location we wanted.
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Eyes on the Future
Small caps got off to a hot start in 2021. By mid-March, the Russell 2000 was up 19% on the year, while the S&P 500 was higher by just 5%. Mega-caps then resumed their near monopoly on investors��� enthusiasm, as the theme of a ���reopening��� economy petered out.
The reopening versus stay-at-home story can be seen in the stock market performance of Zoom Video Communications (symbol: ZM). The stock ranged from $60 to $110 before the pandemic. But when the world changed in mid-March 2020, Zoom surged. That made sense, given that much of the corporate and academic world was making a swift shift to online operations.
Zoom peaked last October at $588 per share. Back then, it felt as if the stock could do no wrong. The entire world was using Zoom���s platform and it appeared virtual meetings were here to stay. But, alas, it was an awful time to buy the stock. If you held it through today, you���d be down more than 40% from the high 10 months ago.
Zoom bottomed three months ago at $273, weeks before the Delta variant started hogging frontpage headlines. As often happens, it seems the financial markets had an inkling another shoe was about to drop���and investors started bidding up Zoom���s share price, which peaked most recently in early August.
Since then, the stock has fallen back 15% from its early August high. What���s going on? As investors look ahead���which is what they always do���perhaps they���re starting to discount the Delta variant and focus on better times ahead. Indeed, the market often discounts news quickly. Own individual stocks? Keep in mind that when a company becomes a Wall Street darling, that���s often the time to take profits.
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