Jonathan Clements's Blog, page 321

Good Company

AS MY PERSONAL and financial life gradually became more orderly in the months after my husband’s death, I found myself wrestling with one particular investment: My late husband had spent the bulk of his working life with Union Pacific and, like longtime employees at so many companies, he’d accumulated a significant number of shares. What should I do with those shares?

My husband and I occasionally discussed the dangers of overweighting company stock—something that often happens when shares are used for the employer’s 401(k) matching contribution or they’re granted as part of incentive pay packages. Over the years, he funneled less money into company stock and instead invested in broadly diversified index funds.

Still, whenever Union Pacific paid a dividend, he’d reinvest the money in the stock. That meant his holdings kept growing. At the time of his death, his portfolio was substantially unbalanced.

Now that he’s gone, the things that were his are all I have left, along with the memories and shared experiences that those objects evoke. For me, this element of his life’s savings has become something more than simply a portion of his compensation that resulted in an unbalanced portfolio.

On the other hand, when I look at our combined assets that I now manage for my own ends, this holding seems excessive. I considered reducing it substantially and replacing it with a total market index fund. But for the moment, I’ve decided to hold onto all of the shares. Wholly rational financial decisions do not come easy. But despite my sentimentality, I’m comfortable that this choice makes sense, even if it’s imperfect, for five reasons.

First, the quarterly dividend is solid. Union Pacific has paid dividends for 120 years. This creates another long-term income stream to meet my everyday expenses, build up my cash reserve and divert into a total market index fund. My three teenagers and I are living the widow-and-orphan life and, yes, this stock has earned the “widows and orphans” moniker.

Second, over the years, I learned a lot about the company, its business and its competition, and I continue to watch this sector of the economy. I won’t accidentally forget to pay attention. Should my expectations of its long-term value prove wrong, I will need to—and want to—sell.

Third, I like the idea of continuing to grow my total worth for as long as I can. I hope to see the overweight issue resolve itself, as I add to other assets.

Fourth, I need to consider possible capital gains taxes. I don’t plan to use this money for a while, so I prefer to have the whole of it working for me, without losing a nickel to the taxman.

Finally, I find comfort in the ongoing connection to my husband’s company, and to the memories of the many good times we enjoyed with friends and colleagues through the years.

What lessons should you take away from all of this? Here are four:

Yes, a handful of billionaires overweight their own stock. But millions of millionaires own the broad market—and, for everyday investors, that’s probably wiser.
A good rule of thumb: Don’t allocate more than 5% of your portfolio to any single stock. Unless you have a darn good reason.
Your portfolio serves many purposes. It’s more than simply a collection of financial instruments where you accumulate your life’s savings.
Avoid emotional and irrational decision making. Except when you can’t.

Catherine Horiuchi recently retired from the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Catherine’s earlier articles include From Two to One, Missing a Step and Thanks, Younger Self.

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Mind Over Money

MAKING CHANGES to our everyday behavior isn’t easy. Inertia is a powerful force: Our brains tend to be on autopilot, not thinking much about what we’re doing—or why we’re doing it. It’s time-consuming and takes effort to pause and reflect on our habits and behavior.

Like so many others around the world, I found myself in lockdown earlier this year. I took advantage of the time to reassess my finances. I was shocked by some of the spending patterns I spotted, especially the mismatch between my expenditures and my preferences. I found that I’d been dedicating time and money to activities that weren’t adding much to my life.

No matter how mindful I thought I was about my financial habits, checking my spending showed me the truth: I had regularly failed to make the right choices in the moment, despite knowing that I was likely to fall prey to such mistakes. Many of these expenses—often resulting from unnecessary visits to the shopping mall—were nonexistent a few years ago, but suddenly they were eating up a significant part of my spare cash.

I can’t even count all the random things I bought. There was the high-end camera that I thought would turn photography into a hobby. It hasn’t. There was a collection of graphic novels that still sit sealed on my shelves. There’s my wardrobe filled with twice as many items as it needs to be. To be sure, these won’t put too much of a dent in my ultimate retirement nest egg. Still, I feel bad for wasting several hundred bucks on things that I’m not using or deriving any pleasure from.

I decided to do something about my behavior, so it improves over the coming months. I listed the activities I missed the most during lockdown, along with the positive effects of each one. Playing soccer with my friends is on the top of the list. Not only do I get to exercise playing my favorite sport, but also it’s a social activity that connects me to other people. Other items on the list include visiting my parents on weekends, going on holiday with my significant other and walking on the beach.

On another sheet of paper, I made a second list, detailing my short-term and long-term goals. For the near future, I listed saving for a vacation near the mountains and visiting a new country. For the long haul, I wrote “buying a house.”

Going forward, my plan is to be more conscious about my choices and evaluate how my actions align with my priorities. If something isn’t contributing to my objectives, I want to avoid it.

Marc Bisbal Arias holds a bachelor’s degree in business and economics,  and is a Level I candidate to become a Chartered Financial Analyst. He started his professional career at Morningstar, performing research and editorial tasks, and is currently employed by Dow Jones in Barcelona, Spain. Marc’s previous articles were The Upside of Down and Setting Boundaries. Follow him on Twitter  @BAMarc .

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Making Cents

IT ISN’T HARD these days to find media stories about family financial troubles—living paycheck to paycheck, no retirement savings, no emergency money and so on. These news reports often include complaints about the limited opportunities to get ahead financially.

That got me thinking about my own work history. My memory of earning money goes back to 1953, when I was age 10. It was about then that I recall understanding that you needed money to get stuff, like a peashooter, caps for a cap gun and goldfish.

An allowance was out of the question, because my parents were focused on paying the rent. My father was a salesman at an auto dealership. He didn’t get paid unless he sold a car. We lived under the 1930s motto, “Use it up, wear it out, make do or do without.”

I had to be creative to raise cash. There were many ways to make money in my youth, some of which may be considered demeaning today:

In the 1950s, a soda bottle had a two-cent deposit. Convincing neighbors to give you their empties was a skill. Rummaging through the local park’s trash cans yielded more empties and, on occasion, the prized large bottle worth a nickel deposit. Two of those big boys got me an ice cream cone and three, believe it or not, a slice of pizza.
As I grew older, I needed more cash for the movies, buying presents and more expensive stuff, like model airplane and car kits. I expanded my work repertoire to include raking leaves and shoveling snow. Today, that seems to be passé. In the 45 years I lived in my house, I can count on one hand the times a teenager asked to rake leaves or shovel snow.
I grew up in a building with 24 apartments. A giant coal-burning furnace presented income opportunities, by helping the building superintendent shovel coal and take out the ashes. That building also had dumbwaiters. Pulling them up to each apartment to collect garbage every evening meant more cash.
The apartment building presented me and my sister with a captive customer base—for shoe shining. Also, our neighborhood version of Our Gang put on plays and carnivals, charging parents a dime for the privilege of attending. Throwing a wet sponge at my face was popular at our carnivals, though I’m not sure why I was selected for that role.
We tried our hand at a lemonade stand, too—with the juice freshly made. It was my first lesson in business failure. Nobody wanted to pay for quality. The next time it was Kool-Aid.
About age 13, I talked my way into working at a pet shop after school and on Saturdays. The pay: $5 a week and an occasional free goldfish. I became adept at cleaning parakeet cages.
Back in the 1950s, you could sell things like greeting cards door to door and earn prizes. Mine was a .22 rifle sent to me in the mail. It’s still one of my prized possessions—because I earned it. Imagine today sending your kids door to door all over town, let alone to earn a rifle.
The quest for cash became more serious around age 15. I got an afterschool job at the local library for 75 cents an hour shelving books and running the mimeograph machine. By the time I graduated high school, I was earning $1.20 an hour.
That library experience came in handy a few years later. While in the army, I got a part-time job in the base library.
Once instilled, the desire to earn money is there to stay. After I retired, I started my blog. Why not earn a little extra cash? Last month, the blog’s revenue was $5.05. But the thing is, it isn’t really the final score that’s important, but the quest. I think that explains the frugal nature of your everyday millionaire, who enjoys the challenge of earning money, but sees no need to flaunt it.

When I was a kid, there always seemed to be a way to make money if you were motivated, but times have changed. The bottles have become plastic throwaways, the coal is natural gas, shoes are $200 sneakers, libraries have fallen prey to search engines, kids play on tablet computers and suburban homes have snowblowers.

Is all opportunity and motivation lost? I wonder if kids today even need extra money or give any thought to earning it. Many of them seem to have plenty of stuff. While working at the local pet shop may be a thing of the past, I shudder to think of our future if there are truly no opportunities for children to use their creativity to make a few dollars, while also learning the value of money.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Scared Debtless, What If and Despite Myself. Follow Dick on Twitter @QuinnsComments.

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Don’t Leave a Mess

I’VE BEEN INVOLVED in settling five estates. They ranged from insolvent to almost seven figures. Some were well-organized, but one took significant time and effort to settle. These experiences taught me a key lesson: An organized and easily understood estate is a gift to those you leave behind.

I’m not an estate planning attorney. I’ve dealt with a few and found them to be professional, empathetic and helpful. If you have a complicated financial life or family situation, I highly recommend finding a good one. For most of us, however, an estate plan can be fairly simple and shouldn’t involve large legal costs. Here’s a list of seven must-haves:

1. A will. This important set of instructions directs who inherits assets that you own individually but with no beneficiary listed. A will also designates a guardian for minors and appoints an executor to administer your estate after your death. You’ll want to keep the signed original in a secure place, known to your family or your executor.

2. Powers of attorney. You’ll need two types of power of attorney, or POA—one financial, the other medical. The financial POA names someone you trust to help manage your financial affairs. You can control the timing of when it goes into effect and when it lapses.

You also need a durable power of attorney for health care. This POA appoints someone to make medical decisions for you, if you can’t make them yourself. You should discuss both these documents with the people you’re assigning, so they understand your wishes. Both documents no longer have any legal standing upon your death.

3. Beneficiaries named. If you have a beneficiary listed on an asset, that almost always trumps what your will says, so the asset goes directly to the beneficiary and doesn’t go through probate. This is an area where many people mess up: Make sure your beneficiary designations are up to date.

Check all your retirement accounts, insurance policies and pensions. Many taxable accounts, such as savings, checking and brokerage accounts, can have transfer-on-death (TOD) designations that act like a beneficiary designation. Check with your financial institutions on how to set up a TOD beneficiary. You can usually have primary and secondary beneficiaries, and designate that folks receive differing percentages of the account.

4. Funeral instructions. Pondering their own demise is difficult for many people. Still, it’s important to make sure your family or executor know your wishes. It’s so much easier to go to the funeral parlor with a clear idea of what your loved one wanted, right down to small details like the songs to play at a service. You can even plan your own funeral, if that’s something you’re comfortable with.

5. Letter of instruction. A letter of last instruction is an informal document that gives your survivors information concerning important financial and personal matters that must be attended to after your demise. I’ve heard people call this the “death file” or the “doomsday letter.” The more detailed it is, the better.

6. A family conversation. As difficult as this subject may be, it’s important that someone knows your wishes and where key information can be found. I’m a big proponent of being open with your adult children about your finances and other personal matters. The discussions may bring up issues you hadn’t considered or perhaps have the wrong idea about.

7. Account consolidation. We spent more than two years finding and simplifying the financial assets of my wife’s aunt. Sadly, we didn’t start this until her cognitive decline had taken hold. We had to file a dozen POAs. Many institutions had their own forms which needed to be notarized or have a medallion signature guarantee. It was a labor of love and very educational, but also a lot of work.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. Rick enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. His previous articles include Treasure Hunting, Taking the Hit and Buyer Take Care. Follow Rick on Twitter @RConnor609.

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Choice Words

AS WE MAKE financial, political and other decisions, we’re bombarded with messages that supposedly offer helpful information. But as savvy consumers of news and advertising, we need to realize that we aren’t nudged just by the content of these messages. It’s also the packaging that can have a huge influence.

Below are 21 ways that information is packaged to make it more enticing. Think of this list as a follow-up to my earlier article, Terms of the Trade, which has garnered almost 80,000 readers over the past year and is now used by many economics teachers.

Ad hominem. Where folks attack not the competitions’ products or ideas, but the competitors themselves. “Look at how he dresses.”

Anecdotal evidence. Using isolated examples as representative of most or all circumstances. “I know someone who once hopped on one foot at midnight and her warts went away.” If anecdotes are used that don’t accurately represent the overall situation, this is a sampling error.

Complementarizing. Positioning a product or idea as “necessary” if you’re also consuming another product. Think about fries with a burger or matching shoes with a dress. “If you buy this base model car, you really won’t get all you can out of it without the deluxe sport package.” “If you believe we ought to do X, then you have to be for Y also.”

Confirmation bias. Playing to consumers’ tendency to look for information that matches their already established beliefs. The consumers are then predisposed to accept the claim as true. “Of course, it’s better made. It was made in the U.S.” This is a major factor in today’s fragmented, polarized news consumption.

Curation. Selectively picking information that puts something in the best light, while omitting other information that—while accurate—may cast a negative shadow. This is what just about everybody does on social media when discussing their vacation.

Ethos appeal. Trying to get someone to accept a message because of the consumer’s trust, respect or belief in the endorser, even if the information is questionable or the spokesperson is unrelated to the product. Think about a brick company using an NFL quarterback as its spokesperson.

Fads. Consuming or believing something because “everybody” is doing it. (Yes, I still have my pet rock from the 1970s.) Some little-known products or ideas are declared popular by their purveyors, so that people will embrace them, thus allowing the sellers to then confirm their initial claim thanks to this feedback loop. Fads can also be indirectly communicated by tacit pressure. Ever go to a party where you’re underdressed compared to everybody else and, though nobody says anything, you feel out of place? Yeah, that’s it.

False scarcity. Making something appear more valuable—and hence desirable—because access to it is limited. “Only smart people will understand this” or the classic “limited time offer.”

Free good. Telling potential buyers that they’ll get a bonus, like a “free gift with purchase,” when the cost has already been factored into the product’s price. This is a common sales technique in women’s accessories, with Estee Lauder a pioneer. Think also about frequent-buyer programs that offer “rewards” after a certain amount of purchases.

Implied messaging. Beware folks who declare, “All I’m saying is….” They aren’t.

Negative honorific booty. A complicated name for a simple idea: If you own such items, you signal that you’re a badass and command respect as a rebel or disruptor. You’re your own person—along with thousands of other who have acquired the same booty.

Niche targeting. Saying that a product is tailor-made just for people like you. Yogurt is healthy for men and women, but the target most often is diet-conscious women. The purveyor often implies it’s rejecting popularity—maybe even sacrificing its own profits—to make sure people like you get what you want. A seller might also create an air of false exclusivity. This is often communicated by an inside joke or reference. There’s a wink that says we can prove we’re an “insider” by accepting what’s proffered, while non-consumption shows you aren’t “one of us.”

Othering. In many ways, this is the flip side of the “niche targeting” coin. It’s the suggestion that those who don’t consume the desired product are different—in a bad way. You don’t want to be like “those others.” Apple built its brand by othering personal computers that used Microsoft’s operating system.

Pathos appeal. Using emotional pulls to get people to consume products or information. The seller might play on sympathy or use fear mongering, in which the purveyor warns of the dire consequences of not believing its message. This is sometimes done by a visceral punch, where the ad opens with a gut-wrenching scene that makes you emotionally receptive to the pitch.

Pecuniary emulation. Coined by the famed father of behavioral economics, Thorstein Veblen, it’s the idea that we consume to look richer or more educated than we are. The message: If the elites do it, we should, too.

Sentimental value. Adds value to something because it reminds the consumer of “happier days.” Think of advertisements for products that we loved as kids and—tapping into our nostalgia—promise to make things “like they used to be.”

Strawman argument. Falsely claiming that the competition advocates something, only so the purveyor can then easily knock down that argument to make itself look better. “They say their product will make you never have to worry about money again, but no one can guarantee that.”

Trolling. Responding to competitors with emotional appeals that don’t really address the issue or facts, and instead are more geared to upsetting the competition and throwing them off their game. It might be an ad hominem attack or a wild claim about a competitor’s product. If used with humor, it can be a pathos appeal whereby the troller gets the potential consumer to enjoy the trolling, thus becoming more disposed to favor the troller’s product. This is a popular technique on the internet, where scoring quick superficial points often wins over thoughtful dialogue.

Tokenism. A more symbolic than actual representation of how diverse the consumers of a product are. This gives the impression that the product appeals to many demographic groups. You see ads with what seems like a forced attempt to show different kinds of people loving a product.

Trope. Using a familiar or recurring idea so that the message is more easily delivered. Having a genie promote a product makes it seem like a “magical solution,” even if the genie is slightly disguised, or telling the hero’s backstory of overcoming hardship to make him both familiar and admirable.

Viral marketing. When the marketers use plain folks to promote a product, so it looks popular or like a fad. Don’t like slick salespeople? We might forget our wariness if a neighbor, friend or even our spouse tells us the same thing.

Don’t want to be fooled by such packaging? The key, as always, is to be an “active consumer.” Read the labels. Ask if the information is accurate. Shop around. And, above all, ask yourself if it’s right for you.

Author’s note: I’m happy to have people use this list or my earlier one to teach economics or media literacy. All I ask is that you give proper attribution to both HumbleDollar and me. And if you have a minute, drop me a line , and let me know where the articles are used and how the lesson goes.

Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. His previous articles include A Poisoned Chalice, Falling for Flattery and Buying Power. Jim is the author of  Media, Marketing, and Me, about teaching behavioral economics and media literacy, as well as Summa, a children’s story for multiracial, multi-ethnic and multicultural families. Jim lives in Granada, Spain, with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog on retirement, finance and living abroad at YourThirdLife.com.

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Sticking With It

I CAME ACROSS a statistic so surprising it was hard to believe: During the recent market downturn, according to Fidelity Investments, approximately 15% of investors sold all of their stock holdings. And among investors age 65 and older, nearly a third sold all their stock market investments. It was a discouraging figure, meaning that large numbers of people had picked exactly the wrong time to abandon their investments.

Fortunately, the figures were corrected a few days later. The actual numbers turned out to be far smaller. That’s good news since the stock market recovery, like the downturn itself, was the fastest on record.

Still, some people did give up on the market while it was down. On The Wall Street Journal’s website, where these figures were reported, the article sparked a furious debate, with some readers still vehement that selling stocks was the right thing to do.

One wrote that, “I simply don’t understand the logic why almost all financial advisors say to ride this out.” Another put it in more colorful terms: “The marketeers say to stay the course. Do not ask a butcher about the merits of a vegetarian diet….”

Many took the opposite view, arguing that it would be a mistake to sell out of stocks. One reader wrote, “Have fun in 20 years when inflation has destroyed the purchasing power of your ‘safe’ cash and CDs. I believe in the U.S. and in the miracle of our economy…. I’m all stocks and always will be!”

Others didn’t necessarily weigh in on either side. Instead, they just offered their own personal prescriptions: “10% cash, 45% six year or less duration bond fund and 45% in S&P index fund is all you need.”

In all, there were more than 300 reader comments on the article. What struck me, though, is that people were largely talking past each other. It sounded more like a political debate than a financial one.

But unlike a political debate, there is a right answer to this question. The numbers, as you might guess, tell us the best strategy is to stay the course. According to a review by Vanguard Group, no fewer than nine different studies going back to the 1960s have confirmed this.

But I can understand why some people still sell during market downturns. Every market downturn is different and scary in its own way—and this one was no exception.

Canada’s Financial Post captured it well. In a mid-March article titled “This Time Is Different,” one economist explained why he saw this crisis as even worse than 2008, which was itself terrible: “In the [2008] financial crisis, air travel didn’t come to a halt, borders weren’t being closed, we weren’t talking about quarantines and self-isolation…. [P]eople weren’t scared to leave their homes…. The reality is the [2008] financial crisis did not come with a mortality rate.”

In my conversations with investors over the past few months, I’ve heard these same sentiments. This pandemic is scary and there is no real parallel or precedent. Yes, there was the 1918 flu. But the economy and our health care system were so different then that it’s hard to compare. In fact, according to a Federal Reserve paper, economic data from that era are so limited that it may be impossible to make comparisons.

What’s an investor to do? Sure, the data might say it’s a mistake to sell, but historical data points are, by definition, backward-looking. If the current crisis, or one in the future, looks different enough and scary enough, what use is the data? Why shouldn’t people sell out when a crisis hits? I understand this conundrum and offer two possible answers.

My first answer will sound like circular reasoning, but stick with me. The reason you shouldn’t worry when the next crisis looks different and unprecedented is because all crises are different and unprecedented. If you think about it, our country has been through numerous traumas before—some much worse—and has always survived and gone on to prosper. Amid 2008’s financial panic, Berkshire Hathaway Chairman Warren Buffett articulated this point, as I mentioned last week.

I’m a little superstitious, so I won’t list the various types of crises that might occur down the road. But the fact is, some number of bad things will inevitably happen. That’s the unfortunate reality. As an investor, if you can accept that, I think you’ll have the right mindset to ride out those crises with greater equanimity.

That brings me to my second answer: Try to gain a deeper understanding of what drives stock prices. Should you simply take it on faith that the market will go up in the future just because it always has in the past? Definitely not. Instead, I’ll again defer to Buffett, who has done a good job articulating exactly why you should believe that the market will go up over time.

In short, economic growth is a function of birth rates, immigration and gains in productivity, including new inventions. As long as the U.S. is an attractive place to live, and we gain our fair share of smart and driven new citizens, and as a whole we’re industrious and productive, that gives me confidence that our economy—and thus our stock market—will continue to grow.

If you were unnerved by this year’s market downturn, I don’t blame you. I would be kidding you if I said I wasn’t also unnerved. And I know there are those who believe we could see another decline. That might well be the case—but if you can keep in mind these two ideas, I think you’ll be able to ride things out with greater peace of mind.

Adam M. Grossman’s previous articles include Think Like a Winner, Looking for an Edge and Divvying Up Dollars.  Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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In Our Own Way

WE ALL WANT the good life, though we’d likely differ on what exactly that is. Still, our wish list might include things like meaningful work, a robust network of friends and family, minimal money worries, service to others, good health, a long life, and a sense of both serenity and purpose.

What stands in our way? As we strive to make the most of the limited time we’re given, it’s worth pondering how we’re constrained and what we can do to improve our lot. To that end, we might look at our life through three prisms:

1. Nature. We’re all born with a set of instincts and abilities—some universal, some individual.

Not all are helpful. Our hardwired instincts evolved to help our hunter-gatherer ancestors survive, which is why most of us are averse to losses, inclined to consume whenever we can and not especially keen on unnecessary exertion. Problem is, in the modern world, these instincts can lead us to overeat, fail to exercise, spend too much and panic when stocks plunge. Consider all the mistakes identified by experts in behavioral finance. In the moment, these mistakes feel like the right thing to do—because that’s what our hunter-gather instincts are telling us.

“Populations in sync with their environment experience no conflict between short- and long-term payoffs,” note Terence Burnham and Jay Phelan in a 2020 article for the Journal of Bioeconomics. By contrast, today, “a good life requires… perpetual discipline to avoid the pitfalls of passion.”

Meanwhile, other attributes vary widely across the population, such as our base level of happiness and the natural talents that we possess. No matter how many motivational speeches we hear or how many self-help books we read, very few of us will ever run 100 meters in under 10 seconds or do the ground-breaking work needed to win a Nobel Prize. No, we can’t be whoever we want to be.

2. Circumstances. We have our nature, but then it meets nurture—otherwise known as Mom and Dad. We’re all born into different levels of economic comfort, with parents who may be good role models (or not) and who may espouse values that set us up well for adult life (or not).

While we can’t all run 100 meters in less than 10 seconds, we can overcome a difficult upbringing—financially or otherwise—and lead a happy, successful life. Unfortunately, this is less common than many of us like to think, at least when it comes to economic mobility. Still, it clearly can be done.

It isn’t just our upbringing that can constrain us. Take those natural talents we all have. The value that the economy puts on these talents varies over time. An example: When my father graduated from Cambridge University in 1956, he didn’t have a firm idea of what he wanted to do, so he decided he’d take the highest-paying job he was offered.

Royal Dutch Shell, then the quintessential multinational, offered my father a position as a management trainee at £700 a year. But that turned out to be the second highest-paying job he was offered. What was the highest? That would be £800 a year as a reporter for The Financial Times. Today, it’s inconceivable that a job in journalism would top the pay scale for newly minted college graduates. The upshot: We can have extraordinary talents—but live at a time when those talents aren’t much valued, at least in terms of dollars.

3. Choices. We start out with our instincts and our abilities, and we’re influenced by our upbringing. But how much of our life is determined by our genes and our environment, and how much free will do we have? It’s a matter of considerable debate.

I like to think that, with thoughtfulness and effort, we can indeed change our life’s trajectory. For those who start with fewer advantages, it’s obviously that much harder. For all of us, there’s a large element of luck. Why did the boss take a shine to your colleague, while barely noticing your hard work? It can be baffling and infuriating.

I can’t tell you how to rectify such misfortune. But I would suggest thinking carefully about the battles you choose to wage.

To be that model modern citizen—who favors healthy foods, eats and drinks in moderation, saves diligently, exercises regularly and has a successful, high-paying career—can be exhausting. It takes huge effort to overcome our hunter-gatherer instincts, our lack of talent in key areas and any disadvantages bestowed by our upbringing. We can aim for self-improvement, including forming better habits and learning new skills. But let’s face it: Self-improvement is often a grind, and the constant effort can leave us deflated and unhappy. As we struggle to save enough, eat healthily, exercise regularly and do what the work world demands, we will fall short, and there’s a risk that we’ll be left with a sense of failure and dissatisfaction.

My advice: Persevere with these battles when they’re important. But don’t expect to be the perfect citizen. Occasionally have that third slice of pizza. Go ahead, have another glass of wine. Sure, skip the occasional workout.

What about also skipping the IRA contribution? Hey, let’s not go crazy here.

Latest Articles

HERE ARE THE SIX other articles published by HumbleDollar this week:

“Paying hefty taxes meant I was making good money, right?” asks Sanjib Saha. “Wrong. Little did I know that high taxes can also be a sign of financial ignorance.”
Looking to buy a home? Morgen Henderson figured she had enough for a down payment and to cover the mortgage. But it was all the other costs that deterred her.
“The car was to be delivered the next day,” recounts Richard Quinn. “Only thing is, I couldn’t sleep. Why would this 76-year-old want a four-year, $40,000 car loan, even if there was no interest?”
Adam Grossman has written 143 earlier articles for HumbleDollar. But this may be his best: Check out the five minds of the successful investor.
Want to get the most from term life insurance? Dennis Ho tackles four frequently asked questions.
“We should view purchasing high-quality bonds in the same way we view a homeowner’s insurance policy,” writes Dennis Friedman. “Like insurance, the true value of bonds isn’t recognized until a crisis hits.”

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Farewell Yield, Knowing Me and The Road Back.

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The post In Our Own Way appeared first on HumbleDollar.

Changing My Mind

THIS PANDEMIC has changed the way we live: Many people are physically distancing themselves, washing their hands more often and wearing a mask when they’re around others. But it’s also changed how I think about money—in six ways:

1. Emergency savings. Before the pandemic, I always thought a cash emergency fund equal to six months’ living expenses would be sufficient. Not anymore. The massive economic shutdown has led to millions of unemployed Americans—and it will take longer than six months for many of these folks to find work again. The implication: Perhaps we need not six months of emergency money, but one to three years of living expenses in a high-yield savings account or a short-term bond fund.

2. Bonds for safety. With yields so low, many people are again questioning bonds’ value as an asset class. Yes, we won’t earn much income from bonds in today’s environment. But their worth is in the safety they offer in difficult times.

We should view purchasing high-quality bonds in the same way we view a homeowner’s insurance policy. Both will protect us from catastrophic events. Just like an insurance policy, the true value of bonds isn’t recognized until a crisis hits. Both the Great Recession and this year’s bear market has shown that U.S. government bonds perform well during economic calamity and can add stability to an investment portfolio.

3. Wall Street isn’t Main Street. During this pandemic, Wall Street-traded large corporations are faring much better than Main Street’s independent small businesses. The S&P 500 is down just 3.6% in 2020 because investors feel big companies will quickly recover. In fact, large firms like Netflix, Amazon and Clorox are experiencing rising sales during the pandemic.

Meanwhile, there are thousands of small businesses in survival mode. They don’t have the financial resources of large corporations to see them through this crisis. Karen Harned, executive director of the National Federation of Independent Business, told NBC News, “After the [2008-09] financial crisis, we lost 1.8 million small business owners. After the reaction I’m hearing, I’m worried about what that number might be after this is over.”

How can you and I help? We should support our local independent businesses by directing more of our dollars to our favorite restaurants and stores. Our money not only helps struggling businesses, but also adds much needed tax revenue for our local government.

4. Compounding’s importance. I was sitting at home one evening watching the news. The show’s anchor was interviewing a public health official about COVID-19 and what could have been done to prevent more deaths. The epidemiologist thought that if we had implemented the stay-at-home order one week earlier, we could have saved thousands of lives. His key point: It isn’t just what we do that matters, but also when we do it.

Isn’t that concept also true of money? The earlier we start saving, the larger those dollars will grow and the less we need to sock away over time to meet our financial goals, all thanks to the wonders of compounding.

5. Money can buy more than just stuff. During the pandemic, I found a buyer for my condo. It took almost three months because of California’s stay-at-home order. The sale was going smoothly until the unit was inspected. The buyer wanted an additional $2,500 for repairs. My real estate agent and I estimated the repairs would cost just $500. I felt the buyer was trying to renegotiate the price, thinking I was desperate to make a deal.

I might have buckled under—if I didn’t have substantial savings to see me through this financial crisis. But instead, I stood my ground and ended up paying just the $500 or so. This wasn’t just about the money. It was important to me to stand up for what I thought was right. That’s what money can buy you, and you don’t have to be Warren Buffett: An adequate savings account will often do the trick.

6. A lesson from Ozark. I admit it, like many others, I’ve been watching more television during the pandemic. I got hooked on the Netflix show Ozark. What I find so fascinating is the calm demeanor of the lead character, Marty Byrde. He’s a financial advisor who launders money for the Mexican drug cartel, and finds himself in harrowing situations that threaten him and his family.

But the guy is relatively calm under intense pressure and doesn’t make emotional decisions. There’s always a rationale behind his actions. Although Marty is a criminal, he reminds me that I should keep my emotions in check while dealing with this health and financial crisis. These are difficult times—and they challenge all of us to act in a thoughtful way.

Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. His previous articles include Error of My Ways, Anybody’s Guess and Don’t Count on Me. Follow Dennis on Twitter @DMFrie.

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Triple Blunder

I’VE BEEN MANAGING my own finances for a long time. Along the way, I did some things right that served me well and some things that didn’t—including three big blunders.

My money-management journey started when I got into a new middle school that was 12 miles from home. The daily commute involved a short bus ride to the nearest railroad station, a 20-minute trip on a suburban train and then a quick walk. To save money, I skipped the bus ride on my way home and walked instead. My parents okayed it and let me keep the nickels and dimes. My first lesson in frugality turned into a lifetime habit.

I was lucky to get an early start on my career in software development. Not only have I enjoyed the work, but also I’ve valued the steady employment and income. I’m fortunate that I never had to worry about missing a paycheck.

You’d think that an early start, steady income and good savings habits would be a sure shot recipe for financial success. I thought so, too. But alas, I didn’t know what I didn’t know. My lack of basic financial literacy during the first half of my working life led to three major money blunders.

Blunder No. 1: Mistaking the sidelines for the playground. Some people choose to stay on the sidelines, sitting on cash while they await a better time to invest in the stock market. Such market timing is controversial, but at least it’s intentional. In my case, I wrongly assumed that bank accounts and certificates of deposit were good investments for the future. I was clueless about other asset classes and their long-term return potential.

Result? Though I saved a lot in my early years, my investment growth was anemic. By not dollar-cost averaging into stocks. I missed out on the magic of stock market compounding. When I learned that asset allocation is the primary driver of investment returns, the cause of my portfolio’s chronic low returns became obvious. I changed course, but the damage already done was huge.

Blunder No. 2:  Lacking long-term financial goals. I was good at taking care of near-term money matters, but oblivious to longer-term goals. Instead of planning, I was saving aimlessly. My approach proved to be a dumb one.

Examples? I rented for too long because I never gave homeownership serious thought. Many friends bought their first homes early on. I could have easily followed suit. Renting vs. owning can be a tricky decision for many folks. But buying would have been a slam dunk in my case—if I had given it some thought.

By the time our need for a single-family home in a good school district became obvious, the local housing market was already on a tear. I was almost priced out of the market by the mid-2000s housing bubble. Luckily, I found a small place that met all our important criteria. Even so, I had to stretch, borrowing more than I wanted to. It took me years to get the burden of that mortgage off my back.

Blunder No. 3: Underutilizing tax-sheltered accounts. I had always viewed a high tax bill as a nice problem to have. Paying hefty taxes meant I was making good money, right? Wrong. Little did I know that high taxes can also be a sign of financial ignorance, as it was in my case. I still pay the penalty for that ignorance.

How? I missed years of IRA contributions because I knew nothing about them. Even my 401(k) contributions were at the default low level—enough to get the full employer match, yet far below the allowable maximum. I saved consistently throughout my working years, but most of it ended up in taxable accounts. I paid a lot of tax on my investment earnings, especially in my high-income years.

It took me years to realize my goof. By then, I’d already missed the boat for contributions to both tax-free Roth IRAs and tax-deferred traditional IRAs. Thankfully, my employer’s 401(k) plan offered the chance to make mega-backdoor Roth conversions. I took full advantage of the plan, maximizing both pre-tax and after-tax contributions in an effort to make up for lost time.

Did any of these blunders destroy my finances? No. I was protected by my steady career and frugal lifestyle. Still, these mistakes made my financial life much harder than it needed to be.

A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles include Freedom Formula, Feelin’ Groovy and Ready or Not. Self-taught in investments, Sanjib passed the Series 65 licensing exam as a non-industry candidate. He’s passionate about raising financial literacy and enjoys helping others with their finances.

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Scared Debtless

MONEY IS ONE of the most emotional issues we deal with. It can create both immense stress and moments of pleasure. I’m guessing the way each of us view money, and how we handle it, is as unique as our fingerprints.

My wife’s car of 14 years was kaput and headed for the junkyard. Fixing the wiring and computer on her 2006 Jaguar would have cost $5,000—far more than the car was worth, even though it was otherwise in very good shape. The Jaguar was my wife’s dream car, her pride and joy, so I took the Leaper off the hood and had it mounted as a memento.

My father was a car salesman, but I hate buying cars. I dislike haggling and I have little idea of what’s a good deal. Nevertheless, we shopped. Our quest was complicated, given that I insisted on every available driver-assist feature, because my wife is nearly blind in one eye after getting hit by a baseball last year.

Not surprisingly, our last stop was a Jaguar dealer. Lo and behold, we found a leftover, fully equipped 2019 model.

Here’s where it gets complicated. What to pay and how to pay? The dealer had what seemed like a good deal: You could buy any new car, with no money down and an interest-free loan for up to 72 months, plus all routine service is included for five years.

That sounded quite attractive—not so much the 72 months, but the zero interest. Despite the fact that I dislike debt even more than shopping for a car, I was seduced by the possibility of keeping cash in our bank accounts. We then learned the sale price was $2,000 more if we took the interest-free loan. Upon consulting my iPhone, I estimated we’d avoid that much in interest after just a few years, assuming the interest rate would have been 3%. This was getting complicated. Should I save money by carrying debt, even though debt isn’t a great idea for a retiree?

Now we had the price of the car. Added to that were taxes and fees, plus insurance on the wheels and tires. Hold it, I know what you’re thinking. He spent money on wheel insurance? With expensive wheels, thin tires and Northeast potholes, it isn’t a bad idea. Besides, the insurance also covers dents, dings and scratches. I’ve already collected for three tires and one wheel on my current car—far more than the cost of the insurance.

I charged an amount equal to the taxes, fees and wheel insurance to my Amex card—for the points, you know. Recall I’m frugal. Meanwhile, for the car price itself, I applied for a 48-month interest-free loan. The monthly payment equaled my wife’s monthly Social Security check, which seemed far more than a coincidence. The interest cost avoided was $2,498—for which I paid $2,000 more for the vehicle.

The car was to be delivered the next day. Only thing is, I couldn’t sleep. Why would this 76-year-old want a four-year, $40,000 car loan, even if there was no interest? Then I get a call from the dealer. I couldn’t take out the loan and have the car registered in my wife’s name. I was saved from myself. There was no way “her” car was not going to be her car. Since her sole income is half my Social Security check, a loan in her name was out.

Enough of this wrangling. I tell the dealer to cut the price by $2,000, leave the extras on my Amex and I’ll write a check for the balance. I’m ready for a peaceful nap.

Our banking is compartmentalized. I have a checking and savings account, as does my wife, and then there are also accounts used for monthly fixed costs and one for travel. The travel account is overflowing, after getting large refunds as a result of our recent cruise fiasco. Let’s face it: We won’t be going anywhere soon. A car is used for traveling, right? So a chunk of the car cost comes from the travel account and the rest from our savings accounts. We’ve borrowed from ourselves and will replenish with what would have been monthly deposits to the travel account. Have we lost interest on those accounts? Have you checked the rates paid on savings and checking accounts recently?

I suspect someone with a more sophisticated approach, as well as maybe more aggressive negotiating skills, could have done better. But these are my fingerprints. I’m happy, my wife is happy, our emergency funds are still intact, and we have no new debt. Sometimes, the path of least resistance—and sound sleep—is the way to go.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include What If, Despite Myself and Battle Over Benefits. Follow Dick on Twitter @QuinnsComments.

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