Jonathan Clements's Blog, page 356

Double Checking

A LITTLE WHILE back, I found myself in an Uber. The driver began to share his political views. Before long, it became clear that his point of view was well outside the norm. He explained that the Federal Reserve is not a government entity, as most people believe. Rather, it is privately owned by the Rothschild family. In addition, he said, the Rothschilds also control the president���not just this president, but the presidency in general. The Command-in-Chief, he said, is just a puppet of the Rothschilds.

Recognizing the absurdity of these statements, I gently suggested he double-check his facts. But he saw no need. ���I have checked this information many, many times, my friend.��� Clearly, he was getting his information from less-than-reliable sources. But sadly, he showed no interest in contrary opinions.

This is obviously an extreme case. When it comes to investments, though, it���s not unusual to find yourself caught in the cross-currents of information and misinformation. How can you avoid this? Below are 10 ways to help validate your investment choices:

Share your portfolio with a friend. For most people, money is a private topic. And yet we could all benefit from another set of eyes on our finances. This is especially true if you manage your own investments. One way to do this while still preserving your privacy: Make a photocopy of your account statement and simply cut off the ���market value��� column before sharing it with others. While this isn���t perfect���since the weighting of each investment is also important���you can still learn a lot by discussing��what��you own.
Share your portfolio on the Bogleheads forum.��Named in honor of Vanguard Group founder Jack Bogle, this online community is a vibrant gathering place for devotees of Bogle���s philosophy. It���s a group like no other. So dedicated are they to spreading the gospel of simplicity and low cost that they are happy to review someone���s investment portfolio at no cost.
Call Jill.��One of the deans of personal finance, Jill Schlesinger hosts a twice-weekly radio show called ���Jill on Money.��� On this show���which is also available as a��podcast���Schlesinger takes calls from listeners and does a remarkably good job of pinpointing key issues.
If you work with an advisor, ask for an explanation of the philosophy that drives his or her thinking���and how the advisor translated that thinking into the portfolio you hold. When your advisor answers, ask yourself: Does this sound like evidence-based logic or superficial sales-speak?
Watch the incredibly useful and��enjoyable videos produced by University of California at Berkeley finance professor Terrance Odean. Together with colleague Brad Barber, Odean is famous for a series of studies in which he evaluated the track record of individual investors. If there���s anyone who understands where investors tend to go off track, it���s Odean.
Call your accountant. At this time of year, after April 15th, CPAs have much more time in their schedule. A useful exercise: Make an appointment to meet in person. Bring your 2018 tax return and ask your accountant to comment on the tax-efficiency of your investments. You should, of course, be interested in specific tax-saving recommendations. But more important, this may help you evaluate the quality of your investments. In my experience, tax-inefficiency is often a sign of a low-quality portfolio. No, this isn���t an ironclad rule. But if your CPA has reservations about your portfolio, you may want to scrutinize it further.
Pick up a publication you don���t normally read. If you typically read The New York Times, check out what The��Wall Street Journal��has to say, or vice versa. You could also check out��Money��or��Kiplinger���s, two venerable personal finance magazines available on the web. Do I agree with everything they say? Hardly. But it���s a good exercise to expose your thinking to new ideas.
Read a blog post titled ���150 Portfolios Better Than Yours��� on the White Coat Investor website. This article is a tour de force and illustrates literally 150 smart ways to build a portfolio. If your portfolio differs markedly from all of these, that���s a sign that you may want to bring in a second set of eyes.
Watch��this video of blogger J.L. Collins speaking to an audience at Google headquarters.��Collins is not your typical financial writer. His blog actually started as a series of letters to his young adult daughter. Over time, Collins has developed a well-earned reputation as a keen thinker and straight-shooter. If you like this video, you might also enjoy��Collins���s book. Alternatively, if you want the short version and don���t mind a heavy dose of profanity���and I mean��heavy���Collins has condensed his no-nonsense advice into a whimsical��one-minute video.
Hire a by-the-hour investment advisor to review your portfolio.��I do that as part of my advisory business���as do others. Two hourly advisors I respect:��Rick Ferri and��Allan Roth. You can also search Garrett Planning Network’s��website��for hourly advisors.

As for the Uber driver? I suspect he isn���t a HumbleDollar reader. Just a wild guess.

Adam M. Grossman���s previous articles��include Oddly Effective,��Fact vs. Fantasy��and��Out of Stock . 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 .

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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Whither Vanguard?

IT WOULD BE difficult to overemphasize how important Vanguard Group is to everyday investors. Many of us have money at the Malvern, Pa., behemoth, which easily ranks as the largest mutual-fund company. But even if investors don���t, they���ve likely still benefited, as other companies have moved to slash their fees and expand their lineup of index funds to compete with Vanguard.

Well aware of this, I follow Vanguard closely���and even more so since Vanguard���s founder, John C. Bogle, died earlier this year. Jack hadn���t been involved in running Vanguard���s day-to-day operations for two decades. Yet his presence continued to loom over the place. I always felt Jack acted as a check on management���s behavior. With his death, that check is no longer there.

Is Vanguard failing investors? Far from it. Earlier this year, Vanguard cut expenses on 22 of its exchange-traded index funds. It was the first time Vanguard made a point of charging less for ETFs than for the firm���s comparable open-end mutual funds. Jack probably wouldn���t have been happy���he preferred open-end mutual funds, because he felt ETFs were traded too much. But it���s hard to argue that lowering expenses is a bad thing. And the fact is, without ETFs, indexing today wouldn���t be nearly as popular as it is.

Meanwhile, not long before Jack died, Vanguard reduced the investment minimum for the Admiral share class of 38 index funds. Admiral shares are Vanguard���s lowest-cost share class geared toward everyday investors���and investors can now get into these funds for $3,000, down from $10,000 before.

This was, no doubt, a competitive response to Fidelity Investments and Charles Schwab. Both have no investment minimum on their index funds, and they���ve lately been operating those funds at tiny expenses in an effort to garner more business. But whatever Vanguard���s motivation, making its lower-cost funds available to more folks is obviously an investor-friendly move.

(A digression: Right now, you only need $1,000 to get into Vanguard���s target-date index funds, but the funds themselves charge higher expenses than if you replicated their mix using Vanguard���s Admiral shares. If Vanguard really wanted to make everyday investors happy, it would introduce a lower-cost version of its target-date funds, even if it meant requiring a $10,000 or even $25,000 minimum investment. Among the many Vanguard investors I talk to, that���s No. 1 on their wish list.)

But while Vanguard has remained on the right path when it comes to both costs and investment minimums, it seems the firm is coming up short in two other areas: product commitment and customer service.

Earlier this year, Vanguard said it was shutting down its Advantage cash management service, prompting an outcry from users. More recently, it announced it was handing over administration of its low-cost variable annuity to Transamerica. There���s now concern that investors in its variable annuity���which is perhaps the only variable annuity worth buying���will face higher expenses down the road.

Vanguard has long been ambivalent about sector funds, which were first introduced by Jack, and that���s reflected in the sorry history of its onetime precious metals fund. In 2004, Vanguard broadened the fund���s mandate to include a wider array of mining companies. In 2018, it revamped the fund yet again, renaming it the Global Capital Cycles Fund. The idea: provide a fund that���s better diversified, but which should still generate returns that aren���t closely correlated with the broad stock market.

Was that a prudent step by management, with an eye to stopping investors from making narrowly focused investment bets? You might assume so���except this year Vanguard turned around and introduced a commodity futures fund. True, the fund has a $50,000 minimum, which means smaller investors won���t be able to buy it. Still, its introduction raises an obvious question: Does Vanguard think sector funds are a good idea or not?

Every time the company flip-flops���whether it���s shutting down its cash management service, handing over the reins of its variable annuity or changing a fund���s strategy���investors are left scrambling. I speak from personal experience. My family and I have been affected by some of these changes.

That brings me to the other big complaint about Vanguard: customer service. I haven���t experienced any problems myself, but I���ve heard from plenty of others who have. On Glassdoor.com, current and former employees rate the firm 3.1 out of five, versus 3.7 for Charles Schwab and 3.9 for Fidelity Investments. This is unfortunate: Happy employees are more likely to work hard to make their customers happy.

To be fair, Vanguard���s customer service problems aren���t tremendously surprising, given that the firm has grown so fast in recent years. Still, you���d think Vanguard would be focusing its energies on these bread-and-butter issues���rather than, say, introducing a commodity fund or exploring the launch of private equity investments.

I remain a huge fan of Vanguard and I have no intention of moving my money elsewhere. It���s still the financial company I���m most likely to recommend to friends and family. But that���s also the reason I���d like to see Vanguard do better. For a firm that loves its nautical imagery, maybe it���s time to run a tighter ship.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include July’s Hits,��Thinking Out Loud��and Balancing Act . Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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July’s Hits

IT SEEMS THAT, when folks go on vacation, they don’t read about personal finance. What’s that about? One result: The first half of July was relatively slow here at HumbleDollar, though the month still ended up ranking as our fourth best ever in terms of total page views.

While absentee readers were getting sunburned, the site continued to post articles every day. Here are July’s seven most popular blog posts:

That’s Enough
Getting Used?
When in Rome
Nothing to Chance
Pay to Play
Under Attack
Blame Game

Meanwhile, among our weekly newsletters, Tax Rate Debate and Balancing Act were the most popular. The 15 sections of our new chapter on Big Ideas also garnered a slew of readers. That chapter joins three others that have been added this year to HumbleDollar’s online money guide: our Financial Life Planner, Portfolio Builder and Great Debates.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Thinking Out Loud,��A Penny Saved��and Third Rail . Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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Naming Names

I JUST WENT to see a lawyer about making changes to my trust and will. It���s been some 20 years since I had my revocable living trust drawn up, and a lot of things in my life have changed since then.��

For most folks, it���s difficult to decide how they want their estate distributed upon their death. Consider five questions:

Should the division of your assets be based solely on relationships, leaving your assets to immediate family, your lover or perhaps close friends who are an important part of your life?
Should you consider how people treated you?
Should you base the distribution of your estate on each person���s financial needs?
If you have children, should each get an equal share, so there are no hard feelings?
If you have grandchildren, do you leave money for their college education?

For some people, it���s an easy decision. I have a friend who has a son and daughter. He says he hasn���t seen his daughter in about 30 years. He has never seen his grandchildren, who are ages 25 and 28. The only time he talks to his daughter is when she needs money.

Meanwhile, he has a close relationship with his son, who looks after him and provides companionship. He decided to give his son everything, except $5,000 for his daughter. His rationale: She may be his daughter by blood, but she doesn���t behave like one in real life.

I have another friend who passed away last year. He has no family, except for a nephew who lives in another state. He had a girlfriend who took him to all his doctor���s appointments and chemotherapy treatments. She cared for him until the very end. Although his girlfriend stayed with him and provided him comfort, he gave his whole estate to his nephew.

The upshot: For some people, the decision on how to distribute their wealth is based solely on family. For others, it���s about how they are treated by family, close friends and loved ones. There is no one formula that everyone should follow. It���s your perception of what���s fair that counts.

Personally, I would not feel hurt or slighted if my mother left my sister more than she left me. I know how much I receive from my mother���s estate doesn���t equate with how much she loves me.

I decided to distribute my own estate based primarily on three criteria. First, I want to leave my wealth to the people who were an important part of my life. Second, I want it to reflect how I���ve been treated by them. Third, I want to do so based on need.

One surprising result: Currently, a major beneficiary of my estate is my 95-year-old mother. She depends primarily on me for care. Without my help, she would need to pay for a caregiver. I would leave her enough money to make sure she���s taken care of. I���m also thinking of providing an open letter, so I can explain my decisions.

When you���re planning your estate, don���t forget about the possessions that aren���t listed in your will���things like photos, furniture, keepsakes and jewelry. They may be just as valuable to your family as your portfolio and your real estate. Indeed, the arguments over these items can cause just as much friction among loved ones. The important thing to remember: These are your assets���and it should be your decision how they���re distributed after your death.

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 Blame Game,��Not as Advertised��and��A Fine Example. ��Follow Dennis on Twitter��@DMFrie.

Do you enjoy the articles by Dennis and HumbleDollar’s other writers? Please support our work with a�� donation .

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Financially Fit

WANT GREATER financial success? It may all start at the local gym and in the fresh food aisle.

���Early to bed and early to rise makes a man healthy, wealthy and wise.��� ���Benjamin Franklin.

Well, Ben, if only it were that simple. While the timing of our repose may not produce all of these outcomes, this aphorism offers food for thought. Are there connections between cognitive ability, physical health and wealth accumulation?

In Tom Stanley���s survey of��millionaires, being physically fit ranked 20th as a self-reported financial success factor. That was below qualities like honesty���the top factor cited by respondents���and having a supportive��spouse, which ranked fourth. But Stanley also found that the majority of millionaires do exercise regularly, with some correlation between frequency of exercise and level of wealth. While I have performed no multivariate analyses, observation would suggest that cognition, health and wealth can create a positive feedback��loop.

Good nutrition is rarely the low-cost option and it���s seldom there to tempt us as we pass through the supermarket checkout chute. Indeed, it takes some combination of intention and financial commitment to eat better. But if we make that effort, we could see an improvement in our physical and mental health, which���in turn���may help us financially.

���I���m in no shape to exercise.������Anonymous

The link between exercise and��cognition is well documented, as are the stories of fortunes lost to scams targeted at those with cognitive impairment. This impairment will, at some level, afflict most of us if we live long enough.

A supportive exercise��partner is a proven resource for increasing the frequency and intensity of our exercise efforts. Some of us have adult kids who cajole us into robust activities, simultaneously satisfying our need for physical exercise, mental stimulation and family connection. You know who you are. Thank you.

It stands to reason that the healthier we are, the more energy we will have to devote to our job in the short term and the more likely we are to have the option of working to normal retirement age or beyond. Conversely, poor health is likely to result in reduced income due to less time at work, and chronic illness may truncate our working life and the attendant growth in savings. This, combined with high medical��expenses, could be a recipe for financial catastrophe.

���If I���d known I was going to live this long, I would have taken better care of myself.������Eubie Blake

We are remarkably adaptive creatures. Even with small��changes, better nutrition can start a positive feedback loop, giving us the energy we need to exercise and leading to improved physical health, better cognition and improved quality of life. Spend some time working on your upward spiral. Your family and your future self will thank you.

When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland.��His previous articles include Fighting for Peace,��Taking Care��and��Twelve Rules .��You can contact Phil via LinkedIn .

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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Making It Work

I���M ONE of the fortunate Americans with a pension. I know firsthand the sense of financial security that comes with steady monthly income.

Others don���t have it so easy. I worry a great deal about the majority of Americans���including my four children���who have no pension, and instead will rely on Social Security and their investments for their retirement income. My fear: Even if these folks are saving regularly, they don���t really understand how to invest or how to manage their nest egg once retired.

Consider a couple earning $60,000 a year who retire at age 66. The main breadwinner���s Social Security benefit might be $18,000 a year. Add spousal benefits, and we���re looking at $27,000 for the couple. Their goal is to replace 100% of their income in retirement.

That means our retired couple must generate investment income of $33,000 a year. To do that, they���d need retirement savings of $825,000, assuming a 4% withdrawal rate. What would it take to amass that much? They���d have to save $711 a month���or 14% of pretax income���for 40 years, assuming they earn a 4% annual after-inflation rate of return. Here���s a closer look at what���s involved:

1. Moving parts.��A calculation like this involves a host of variables:

To reach your target nest egg, you may need more than 40 years. Stay flexible.
Investment gains will vary from year to year and there���s a good chance your long-run after-inflation annual gain will differ from 4%.
Saving more in the early years, when you���re single and with fewer financial commitments, will give a big boost to your nest egg.
I target 100% income replacement. Others say 80% or even 70%. That sharply lowers the required savings rate. If your goal is a 70% replacement rate and you still get $27,000 from Social Security, you���d need to amass just $375,000, instead of $825,000. But before you aim that low, take a hard look at the lifestyle you want in retirement and what debts you may still be carrying at that juncture.

2. Saving diligently.��While socking away 14% of income might seem daunting, it could be less onerous than you imagine.

You may get an employer���s matching contribution in your 401(k) or 403(b) plan. If your employer kicks in just 3%, that lowers your required savings rate to 11%.
Saving on a pretax basis will minimize the impact on your take-home pay. If you���re in the 22% tax bracket, every $100 tax-deductible contribution to your 401(k) reduces your paycheck by $78, not $100. You might save out of pretax income when money is tight, while switching to after-tax Roth contributions when things are better, so you also have a pool of tax-free retirement money.
Save automatically, both through your employer���s plan and by setting up automatic contributions to your favorite mutual funds. This will compel you to save before you get a chance to spend. You���ll then be forced to live on whatever remains���provided you don���t rack up the credit cards.
If your 401(k) has an auto-escalation feature, sign up. When you get a raise, your contribution percentage will automatically increase.
Help your take-home pay situation by using a health savings account or flexible spending account for health care bills. By putting pretax money in one of these accounts, you save not only on income taxes, but also 7.65% for Social Security and Medicare payroll taxes. A health savings account could become a strategic part of your retirement plan.

3. Investing prudently.��You job isn���t done when you meet your savings goals. You also have to make smart investment decisions.

In my opinion, whether you invest through an employer���s plan or elsewhere, you should seek out low-cost index mutual funds.
Many retirement plan participants select target-date funds. With these funds, the investment mix changes as you get closer to your target retirement date, going from more to less aggressive. Target funds can be a good choice: You set it and forget.
While it���s important to track your investments and rebalance your portfolio periodically, especially as you near retirement, it���s a mistake to micromanage. Investing for retirement is not day trading. Even looking at your account too often is a mistake. It may cause you to make unnecessary changes.
Don���t be a victim of short-term panic. All those people who claim to have lost their retirement savings during the Great Recession only did so if they panicked, got out of stocks at low prices and missed the long bull market that followed.

4. Spending it.��There���s one final challenge: generating retirement income and making your money last as long as you do. Using our example, we need to generate $33,000 a year, equal to $2,750 a month, from investments. But how?

Consider an immediate annuity. I know annuities get a bad rap. But according to a Schwab calculator, $825,000 can buy a 66-year-old couple around $3,700 a month for life, with the income continuing until the second spouse dies. Note that this income doesn���t rise with inflation.
If you skip the annuity and generate retirement income on your own, you���ll need to be disciplined. Still, if you really have amassed $825,000 and follow the 4% rule, you���ll have $33,000 in investment income the first year, $33,000 plus an increase for inflation in the second year, and so on. What if you follow this withdrawal strategy? History suggests you shouldn���t run out of money.
You need emergency money, separate from your retirement investments, so you don���t take unplanned withdrawals for unexpected expenses, especially during a big dip in the markets.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Righting Wrongs,��Basket Case��and��Bad to Worse.��Follow Dick on Twitter��@QuinnsComments.

Do you enjoy��reading the articles by Dick and HumbleDollar’s other writers? Please support our work with a��donation.

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Cashing In

STOCK MARKET indexes are at all-time highs, share prices are expensive relative to earnings and global economic growth��is slowing. Is it time to consider rebalancing our portfolios and perhaps adopting a more defensive approach?

If you believe in rebalancing���maintaining a relatively consistent allocation to stocks and bonds���then, at some point in this bull market, you must sell stocks. I am hugely hesitant to do so, for three reasons. First, I am fundamentally a buy-and-hold forever investor, unless I need cash, so I don���t typically rebalance. Second, I hate paying taxes on stock gains in my taxable account. Third, I have no great ideas for what fixed-income alternatives I might buy, given today���s low interest rates.

After years of waffling as markets rose, I recently did something I���ve never done before: I sold a large chunk of index funds in my taxable account, despite not needing the money. Taxes drove my selection of what to sell���I sold holdings with the smallest percentage gains.

As many pundits point out, we don���t truly have profits until we sell. I took some profits and accept that I���ll pay the taxman his due. As an alternative, I could have locked in the gains and postponed taxes by buying a protective put. But puts require a cash outlay, timing considerations and trading complexities that aren���t for me.

I slightly offset these stock sales with stock purchases within my retirement accounts. Since I now have more cash in my taxable account, I can put off tapping my tax-deferred accounts for longer. The unplanned capital gains will also add to my adjusted gross income, likely leading me to reduce my planned year-end Roth conversions or sales of my old employer���s stock.

Do I have a good plan for what to do with the cash I just raised? Not really. But for now, I am happy to live with today���s low yields. I have also structured my retirement accounts more defensively, shifting toward higher-dividend funds and stocks. If the stock market retreats, these stocks should be buoyed by their dividend payments, especially if the Federal Reserve lowers interest rates, as many anticipate.

In this low-interest-rate era, I have become a huge dividend aristocrat fan. Many pay yields of 3% to 4%, while offering low stock price volatility. I own shares of 20 such��stocks���companies like Johnson & Johnson, McDonald���s and Procter & Gamble. They���re basically my only individual stocks. All pay continually increasing dividends. I have effectively accumulated my own dividend mutual fund without the annual fees. Performance has been as good as, or better than, my institutional dividend funds. What���s not to like?

To place a check on my inherent greed, I recently some sold covered calls at even higher strike prices for several of these appreciating aristocrats. This is another new defensive and somewhat bearish approach for me. If these aristocrats keep up their stunning price gains, I���ll sell out a portion at great returns and be automatically rebalanced. If not, I���ll pad my dividend income a bit more with the money earned from writing the covered calls. I���m great with either outcome.

Another possible defensive measure is to put in place stop-loss orders, which are a safeguard against market downturns. I haven���t implemented any stop-loss orders, but I���m watching the markets and they’re certainly an option to consider.

I may be totally wrong in selling some of my stock holdings. The market seems to have upward momentum. The Federal Reserve is set to lower short-term interest rates. But underlying fundamentals also seem weaker���which is why I finally took some money off the table.

John Yeigh is an engineer with an MBA in finance. He retired in 2017 after 40 years in the oil industry, where he helped negotiate financial details for multi-billion-dollar international projects. ��His previous articles include Take It or Leave It,��Got You Covered��and��Nothing to Chance.

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Oddly Effective

MY FATHER-IN-LAW���known to his family as Papa���passed away earlier this month. After 96 years, he had developed a number of money habits that were unconventional but quite effective, including these three:

1. Focused frugality.��Papa was frugal, but not in the conventional sense. He didn���t practice extreme��frugality��and saw no virtue in intentional self-denial. Rather, he practiced what I would call focused frugality. If something was important���his children���s education, for example���he was happy to write that check. He also loved to travel. In those cases, Papa left frugality at the door. But for everything else, he stretched a dollar as far as it would go. And that ended up being remarkably far.

In his later years, I served as my father-in-law���s informal financial advisor. During one of our periodic reviews, he asked what I thought about his asset allocation���that is, his split between stocks and other assets. I responded with a standard question asked by financial planners: ���How much do you need to withdraw from your account each year?���

His reply was one I had never heard before���certainly not from a retiree. ���What do you mean by��need?��� he asked. After some more discussion, I realized that, even in his late 80s, his retirement accounts remained untouched, other than for required minimum distributions. How did he accomplish this? In large part, I believe, it was this focused frugality.

The lesson:��A penny saved is a penny earned. Even if you spend freely with one part of your budget, that doesn���t mean you need to abandon frugality altogether. You can take nice vacations and drive a nice car, and still clip coupons.��These are not mutually��exclusive. In fact, I see them as symbiotic. When you economize ruthlessly in one area,��that allows you��to spend freely in other areas.

2. ���Inefficient��� debt management.��It would be an overstatement to say my father-in-law hated debt. But having grown up in North Africa, he simply wasn���t accustomed to it. He took out a mortgage to buy a home but, other than that, I don���t think he ever carried a dime of debt: no credit cards, no car loans, no home-equity line of credit, nothing. In America, where consumers hold almost $14 trillion of debt, this certainly made him unusual.

I always found this interesting, because any personal finance textbook will tell you that debt, used wisely, is not necessarily a bad thing. Conventional wisdom, in fact, states that consumers should be happy to borrow money when it enables them to invest and earn potentially higher returns. Papa, however, wasn’t interested in what the textbook said. He took a much more straightforward approach. He would buy something only if he could pay cash. What if he couldn’t? The purchase would simply have to wait.

The lesson:��In theory, it���s inefficient to avoid debt. But my father-in-law was not the only one to realize that ���efficiency��� is just a textbook concept. In the real world, there are many benefits to limiting debt. There���s the peace-of-mind benefit. But there’s another, more subtle advantage: When you stick to cash for major purchases, the inevitable result is that you end up spending less. In fact,��research��has found that��consumers spend up to��50% less��when they use cash instead of a credit card. Looking to trim your budget? Try leaving your credit cards at home for a week.

3. ���Inefficient�����asset allocation.��For a retiree in his or her 80s or 90s, a typical asset allocation would consist mainly of bonds. My father-in-law, however, never saw the appeal of bonds and instead limited his portfolio to stocks and cash. Was this inefficient? Yes, perhaps he could have earned more by owning bonds instead of cash. But this is what he preferred.

The lesson:��The definition of the ���best��� investment portfolio isn���t necessarily the one that offers the greatest profit potential. The best portfolio, especially for a do-it-yourself investor, is the one that is easy to set up, easy to manage and allows you to reach your goals. You run a far greater risk trying to make your portfolio ���sophisticated��� than by simplifying it. Never forget: Simple doesn���t mean simplistic.

Adam M. Grossman���s previous articles��include Fact vs. Fantasy,��Out of Stock��and��Say No to Mo . 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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Thinking Out Loud

IDEAS ARE TOOLS that can help us see the world with greater clarity. Indeed, I find myself returning to certain financial notions again and again, because they���re so fundamental to understanding the world of finance and how we can make our lives better.

What are the most important ideas? I decided to create a new chapter for HumbleDollar���s online money guide, which covers the 15 notions I consider most crucial:

Humility
Simplicity
Control
Instincts
Future Self
Hedonic Treadmill
Signaling
Human Capital
Be an Owner
Risk and Reward
Opportunity Cost
Compounding
Skewness
Risk Pooling
Enough

Arguably, these ideas should be divided into two parts. How so? Seven of the 15 notions help us to understand the financial world better. For instance, our human capital is our financial life���s core organizing principle. Risk vs. reward is the fundamental tradeoff every investor needs to wrestle with. Opportunity cost describes a different sort of tradeoff, compelling us to consider not only what we���re getting for our money, but also what we���re giving up.

Meanwhile, skewness helps explain why the investment game is so hard to win���and why indexing makes so much sense. Risk pooling is the key reason to buy insurance. Being an owner, especially by purchasing stocks and becoming a part owner of corporations, is crucial to good investment returns���and those returns can go from good to great, thanks to long-term compounding.

What about the other eight ideas? I readily admit there���s an element of advocacy to them. As we manage our money, we should be humble, we should favor simplicity, and we should control what we can���and find a way to live with what we can���t. We need to rein in our instincts, so we don���t shortchange our future self. We also need to be aware of the pitfalls presented by signaling and by the hedonic treadmill, and instead strive mightily to figure out what constitutes enough.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Balancing Act,��A Penny Saved��and��Tax Rate Debate . Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.

HumbleDollar makes money in three ways: We accept��donations,��run advertisements served up by Google AdSense and participate in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and purchase books or other merchandise, you don’t pay anything extra, but we make a little money.

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Beat the Cheats

U.S. CREDIT CARD fraud topped��$8 billion in 2015 and should surpass $12 billion next year. You can reduce your exposure to such incidents with a few simple steps. Why bother? Won���t the bank pick up the tab when unauthorized purchases show up on your account? Generally, yes, thanks to the Fair Credit Billing Act and the Electronic Fund Transfer Act. But there may be limitations on that protection, based on how quickly you notify your bank when you discover unauthorized charges.

There are two well-established ways your credit card information can be stolen and used.

The most likely scenario is when a hacker exploits weak security measures at a merchant or payment processing company to download big lists of detailed credit card and billing contact info. These tend to be big, disruptive incidents which cost the responsible party millions of dollars and create a lot of hassle for you and others affected. The Heartland Payment Systems hack in 2009 exposed 160 million cards, according to the��indictment of those charged. More such incidents have been reported, including at TJX Cos. (in 2006, 94 million cards), Home Depot (in 2014, 56 million cards) and Target (in 2013, 40 million cards).

The next most common scenario is when an attacker gains access to a merchant���s payment terminal or point-of-sale system at a gas station, restaurant or store, and installs malware or modifies it with a skimmer or shimmer device, to steal info from every card used there. Skimmers exploit the oldest tech on your credit card: the old-school magnetic stripe that holds all��of your card data in an open, unencrypted form. Michaels��crafts stores in 20 states reportedly experienced such a crime in 2011. Skimmer use on ATMs has risen, too.

When these incidents are discovered, banks proactively issue new cards to all affected customers. It���s the right thing to do to reduce everyone���s financial exposure, but it���s a hassle.

Here are five ways to limit your exposure to such fraud:

Set up your credit and debit cards in the electronic wallet on your iPhone or Android. When making purchases in person, use near-field communication (NFC) mobile tap-to-pay technology, like Apple Pay or Google Pay, whenever it���s available. This is your most secure option, usually using a biometric security device on your phone to authenticate before the purchase is enabled. Wireless, secure NFC also avoids the risks from skimmer or shimmer devices.��If you select your debit card���rather than your credit card���from your phone���s wallet app, the same method can be used to log securely into a bank ATM with your phone plus your ATM PIN.
Use your credit or debit card���s chip technology whenever NFC mobile isn���t an option. This requires you to insert��your card rather than swipe. This approach is far more secure than swiping, but still potentially exposes you to shimmers. In Canada and Europe, you may need to use a PIN with your credit card when paying this way.
Limit the number of websites where you check the box to store your credit card data when checking out. Yes, it means purchases take a moment longer and require a bit more typing, but it cuts off grief from big hacks right at the source.
Use features, like Bank of America���s ShopSafe�� and Citibank���s Virtual Account Numbers, to generate a virtual card number (VCN) for one-off web purchases on risky sites or recurring purchases lasting up to 12 months. If your VCN for a merchant is caught up in an incident, just that one VCN will need to be replaced, not the underlying credit card.
If a merchant only supports swiping��a credit card, pay with cash or take your business elsewhere. Merchants have had years to upgrade their payment terminals.

For more secure online payments, there are a few other options popular in the U.S., including services like PayPal. Apple Pay and Google Pay are also expanding to web and mobile app payments. Mastercard and Visa just released specs for new technology that should enable them to compete with Apple, Google and PayPal using Masterpass by Mastercard or Visa Checkout. All of these solve the problems associated with saving underlying credit card information at each merchant. Indeed, we should soon have lots of choices for more secure and convenient online shopping.

David Powell has written software or led engineering teams for 35 years. He enjoys work, vegan fine dining, cycling and travel with his spouse. His previous articles include Get Me a Margarita,��Making a Mesh��and�� Elon and Me .

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