Jonathan Clements's Blog, page 364

Par for the Course

MANY OF US suffer from so-called loss aversion: We get more pain from losses than pleasure from gains. In other words, we���d rather not lose $5 than find $5 we never had.

Loss aversion has been extensively studied in financial decision-making. But it also applies to sports���especially golf. For instance, tournament coordinators might change a hole from a short par 5 to a long par 4. Par measures the number of strokes a golfer is expected to take to complete the hole���and, if they don���t, they ���lose��� relative to par.

When par is reduced by one stroke, the hole itself doesn���t change one bit. Still, one study found that this has a psychological effect on even the world���s best players.

When a hole was labeled a long par 4, golfers were more aggressive in trying to finish the hole in four shots and avoid losing a stroke relative to par. By contrast, when the hole was deemed a short par 5, golfers didn���t push themselves as hard, because they knew they had five shots to make par. Result? Over four rounds of a tournament, this more conservative approach resulted in players recording one extra stroke, on average. In golf, that���s often the gap between first and second place.

For the golfers in the study, their loss aversion helped them play better. But for investors, loss aversion can be detrimental to their success���because they���re so fearful of realizing investment losses. How can you protect yourself from this behavioral mistake? Consider three steps:

1. Separate your money into buckets.��Your money for short-term, intermediate and long-term goals should be invested in different ways. By separating your money into different accounts for their respective goals, you can also temper your loss aversion. How so? You���re less likely to become unnerved���and perhaps panic and sell���when your long-term money experiences short-term losses, because you know your short-term finances are safe.

2. See the silver lining.��Investors are so anxious to avoid realizing losses that they���ll hold on to losing stocks longer than those that have gone up in value. Whether you call it optimism or stubbornness, it���s a behavioral tick to be avoided. While you wouldn���t want to bail out of stocks generally if the broad market declined, there���s no guarantee that any one individual company will recover. Got an individual stock in your taxable account that���s in trouble? Try to look beyond the money lost���perhaps by thinking about the tax savings if you sell your loser and use the capital loss to offset other winners.

3. Take the overnight test.��This is a trick I learned from Carl Richards, The Sketch Guy of New York Times fame. Suppose you own an individual stock that���s fallen in value and you know you ought to sell. Perhaps you hold it in a retirement account, so there���s no tax loss to be had.

Try imagining you went to bed one night and woke up the next morning to find the stock had been replaced by cash. Now, you have the option to buy the stock back at the same price���or reinvest the cash in some other way. What would you do? Changing the perspective can help you make the right decision.

Ross Menke is a certified financial planner and the founder of Lyndale Financial , a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross���s previous blogs include Not Toast,��Cash Is King��and��More to Come . Follow Ross on Twitter @RossVMenke .

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 Street

WHEN WE ROLLED over into May, I was reminded of a saying I used to hear when I worked in the world of stock-picking: ���Sell in May and go away.��� The idea���based on questionable data���was that stocks lagged during the summer months.

This notion always seemed suspect to me. But even if it were true, I was never quite sure what to do with it. Should an investor sell everything on May 1 and then buy back on Labor Day? If so, what about taxes? And what about October, when several notable crashes have occurred, including 1929 and 1987? Should an investor really sit out from May all the way to October every year?

Of course, the whole thing seemed ridiculous. But professional investors talk about such things. There are literally dozens of similar pithy sayings that are what comedian Stephen Colbert might call ���truthy.��� That is, they sound like they ought to be true, but they’re backed up by scant data. That���s one reason, I believe, actively managed mutual funds have lagged behind��index funds for so many years. Professional investors rely as much on opinions, gut instinct and pithy sayings as they do on facts and data.

Does that also mean you should never buy an individual stock? Almost universally, I recommend against it. Investors are much better served, in my opinion, buying low-cost index funds, rather than spending time trying to pick stocks. That said, I do believe individual investors have several inherent advantages over professionals. Among them:

1. Long-term focus.��Fund managers are subject to constant scrutiny. They don’t have the luxury to endure extended periods of underperformance. For a fund manager, when a stock is lagging, the path of least resistance is simply to sell and move on, even if that stock may ultimately bounce back. But as an individual investor, you aren���t subject to the same scrutiny. You can use patience to your advantage in ways the pros cannot.

2. Flexibility.��If you’re running a mutual fund, you need dozens or even hundreds of stocks to build a sufficiently diversified portfolio. That’s a problem because there simply aren’t that many great stocks. The reality is,��most of the stock market’s results are driven by just a small number of outstanding stocks. Counterintuitively, this means the majority of stocks end up being below average.

But if you’re running a mutual fund, you can’t just pick a small number of favorite stocks. To manage risk, a fund manager needs a broad portfolio. This can water down performance.

As an individual investor, you aren���t compelled to do this. As long as the core of your portfolio consists of index funds, you’re sufficiently diversified. That will allow you to buy as few individual stocks as you want, limiting your purchases to only your best ideas.

3. On the ground.��Whatever your profession, you have areas of expertise that can’t be matched by a fund manager sitting in an office. That’s a huge advantage. You can potentially spot new innovations before they become more widely known.

4. Unconstrained.��Virtually every mutual fund has a stated mandate���international stocks or technology stocks, for example���and fund managers must stay in their lane. If they’re running a health care fund, for example, they can try to sneak in other kinds of stocks. But if they do, they expose themselves to the risk of underperformance���and also the risk they���ll be criticized by the fund���s board of directors, the firm���s chief investment officer and fund shareholders.

As an individual, you don’t face these same constraints. You can buy anything. That freedom gives you a much wider pool of stocks to choose from.

5. Zero cost.��Perhaps the biggest advantage you have is cost. It’s not unusual for fund managers to be paid $1 million or more, as well as having a healthy budget for research and support staff. Who pays for all that? The fund’s shareholders. That’s a big part of why index funds are so much cheaper; they don’t need to pay all those big salaries.

Consider 2018. The S&P 500 was down 4.4%, but the average large-cap fund fell 6%. How much of that gap can be attributed to costs? This is an easy question to answer. Since the average large-cap fund charges about 1%, costs account for more than half of funds’ underperformance. As an individual investor, you don’t have to incur those same costs.

All that said, stock-picking isn’t easy. As an individual investor, I think you do have a leg up on the pros, but I would still be very careful. I would limit stock picks to a small part of your portfolio���5% or 10% at most. The rest should remain in broadly diversified index funds.

Also, I would take it slow. Think about it more like fishing than hunting. Don’t waste your time digging for opportunities. Instead, put your line in the water and just wait. If something happens to come along, great. But if nothing ever does, you haven’t lost anything.

What kinds of stocks should you be looking for? The beauty of being an individual investor is that there are no rules. It depends on your interests and areas of expertise. Personally, I think the best opportunities appear when great companies hit some kind of pothole.

Consider Lululemon, the dominant maker of yoga gear. In 2013, it endured an expensive and embarrassing recall when a batch of its pants were found to be too sheer���that is, see-through. Then, to make matters worse, the company’s founder tried to blame the customer. Shares promptly dropped from $80 to $40. But today, with that turmoil long past, the stock is up near $180, having dramatically outpaced the overall market.

As a general rule, I find stock-picking to be a pointless activity. Professional stock-pickers often look like a chihuahua chasing its tail, full of activity but ultimately going nowhere. But as an individual investor, it’s worthwhile to understand the ways in which you might not be chasing your tail���should you choose to pick a stock or two.

Adam M. Grossman���s previous articles��include After the Windfall,��Out of Bounds��and�� Not So Easy . 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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Here to Retirement

WELCOME to HumbleDollar���s new financial life planner, which is designed to complement the��portfolio builder��we unveiled earlier this year.

The life planner���s goal: Guide you through 13 financial steps that���ll help you navigate the journey from your 20s to your 60s and beyond.��Below, you’ll find the first of the life planner���s 13 steps���plus links to the other 12.

Step No. 1: Prep for Success.��All too many Americans lead shaky financial lives. They often overdraw their checking account. They carry credit card balances. They pay bills late. Even an unexpected $400 or $500 expense can leave them scrambling.

We should strive mightily to avoid this sort of financial life���because it���s a life overflowing with stress. How do we escape its clutches? We should cultivate three qualities.

First, we need to build some financial breathing room into our lives, by limiting our monthly fixed financial obligations. In particular, we should make sure our housing and car costs aren���t so large that we���re easily knocked off course by surprise expenses. That’ll also give us a decent shot at spending less than we earn, so we can save for the future. Make no mistake: Good savings habits are the greatest of the financial virtues and the key to amassing wealth.

Second, with discretionary spending like clothes, electronic gadgets and eating out, we need to resist impulse purchases���and instead pause long enough to consider whether these are good uses for our money and whether we can truly afford them. If we can���t resist impulse spending, we might use a debit card instead of a credit card, so the money comes straight out of our checking account. If that doesn���t work, we might default to always paying cash.

Finally, we need good financial habits. That includes not just saving regularly, but also paying bills on time and keeping a close eye on our checking account balance. This will allow us to avoid fees for late payments and bounced checks, and put us on track for a better credit score.

Step 2: Stockpile Cash
Step 3: Doctor���s Orders
Step 4: Aim to Retire
Step 5: Shed Bad Debt
Step 6: Protect Your Pay
Step 7: Buy a House
Step 8: Plan Your Estate
Step 9: Make Projections
Step 10: Educate the Kids
Step 11: Revamp Insurance
Step 12: Pay Off Debt
Step 13: Quitting Time

Thank You

TWO WEEKS AGO, we started seeking��donations to support HumbleDollar’s operations. Since then, 130 readers have answered the call, contributing enough to cover our costs for three months. Many, many thanks.

My hope is that HumbleDollar’s operations��can be supported largely or entirely by donations���and that we can run��less and less advertising over time. This week, as a first step in that direction, we removed half the advertisements from the homepage. If��donations continue to roll in, we’ll eliminate further advertising.

Some readers got in touch, asking whether they could donate via PayPal. Your wish is our command: Check out HumbleDollar’s��revamped donation page.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . ��His most recent articles include Calling the Shots,��Cover Me��and��Singled Out. 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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Help Yourself

FAMILY MEMBERS often look to me to ���sort out��� their financial problems. That���s no great surprise: I���m a fee-only financial planner. But I���ve resisted the ���financial fixer��� role.

Instead, I try to act more as an educator���by reframing the issue at hand and encouraging family members to take an active role in solving their problem. Consider three examples:

1. I have a relative who graduated from an expensive university. He was understandably concerned about his high level of student debt. Less understandable: He was prepaying his low-interest student loans, while continuing to rack up high-interest credit card debt.

Rather than telling him what to do, I asked why he insisted on paying off his student loans faster than required. He explained that it represented graduating to the next stage of life. I told him I appreciated the emotional appeal���and then reframed it as a financial issue.

I asked him to research his current credit card interest rates, as well as his student loan rates. He found out that his highest credit card rate was 20% and his student loans had remained at 5%. He calculated the actual amount of interest he was paying. It became apparent that he would be much better off by first lessening his credit card debt.

2. My son moved home after college, so he could save money while starting his new job. By living at home, he was able to sock away more than $15,000, which sat in a bank earning 0.03% interest. He���s frugal and good with numbers, so I reframed the miniscule yield as a challenge: If he could earn more than $300 a year by taking an hour to move the money to a higher-yielding online savings bank, would he do it? Rather than me presenting this as something he ���should do,��� the question left it as his choice. My son researched online banks and signed up that weekend.

3. After I explained to one relative that term life insurance was almost always a better option than whole life, she pushed back. Her good friend, who was aggressively selling her on a whole life insurance policy, disagreed with me. My response: I discussed the relationship between financial advice and incentives���and showed her that this friendly agent would be receiving a much higher commission by selling her the whole life policy. She ended up buying term insurance.

Rand Spero is president of Street Smart Financial, a fee-only financial planning firm in Lexington, Massachusetts. He has taught personal finance and strategic planning at the Tufts University Osher Institute, Northeastern University’s Graduate School of Management and Massachusetts General Hospital.

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My Sentence

THREE YEARS ago, I decided to write a book about money for my children, then ages 9 and 11. Raising Your Child���s Financial IQ: The Most Important Things��is now finished. Here are six things I learned along the way���which apply not just to writing a book, but also to life more generally:

1. Yes, you can find the time

I���m a physician, working 50 to 60 hours a week. When I get home, greeting me are two children eager for my attention. Where would I find the time and energy to write? My solution: Wake up at 5 a.m. and write for just 25 minutes.

My experience shattered the romance I had always associated with being a writer. I discovered that writing a book is an extremely lonely and slow endeavor. At times, a voice in my head would whisper: ���This is rubbish. You���re wasting your time. Who do you think you are, writing a book?���

2. Jerry Seinfeld���s hack

A young comedian, Brad Isaac, asked Seinfeld if he had any advice:�����He said the way to be a better comic was to create better jokes and the way to create better jokes was to write every day.���

Isaac continued: ���He told me to get a big wall calendar that has a whole year on one page and hang it on a prominent wall. The next step was to get a big red magic marker. He said for each day that I do my task of writing, I get to put a big red X over that day. After a few days you’ll have a chain. Just keep at it and the chain will grow longer every day. You’ll like seeing that chain, especially when you get a few weeks under your belt. Your only job is to not break the chain.���

I realized my job was simply to show up and write every day. It shifted the focus away from the results to the process. For me, it was a gamechanger. While I had little control over the quality of my writing on any given day, I could control the physical act of sitting down and writing.

This simple trick can, I believe, help you excel in anything you pursue, whether it���s becoming a comic, writing a book or training to run a marathon. The key: Make sure you turn up each and every day.

3. Power of compounding

Money compounds, but so do many other things in life. I remind my children about the power of compounding daily. If we do 25 minutes every day of anything, our skills will improve. It was certainly true for my writing: By putting pen to paper each day, it not only became easier over time, but also my writing began to improve.

4. Impostor syndrome

I found that perfectly formed thoughts, elegantly and succinctly expressed, did not flow directly from my consciousness onto the page. I also observed that my writing greatly improved after the second (or third or fourth���) draft. This was a great source of encouragement. But it dawned on me that there was a downside: In the quest for the perfect sentence, I could rewrite forever.

This rewriting also plays into the ���impostor syndrome������the fears and doubts that come with such a lonely and ambitious undertaking. I realized that endless editing had become a way of procrastinating. If I were still editing, I was by definition not finished with my book. And if I wasn���t finished, I would not have to face the moment of truth���showing my work to the world and facing possible rejection.

5. Kindness of strangers

After I finished the final draft of my book, I sent it to financial writers, bloggers and investors who I greatly respected. I meekly asked if they would read the manuscript and provide a blurb endorsing the book. In most cases, I was a complete stranger to them. I was blown away by the response. Not only did most of them read my draft, but they also kindly offered suggestions and gave me blurbs for the book.

If there is one trait that all writers share, especially novice writers, it���s insecurity. It was inspiring and reassuring to receive kind feedback and the all-important blurbs from people I looked up to.

Need help with your career or with some other endeavor? What I learned is that even those you consider famous or important will surprise you with their kindness. Don���t be afraid to ask for help���and be sure to pay it forward.

6. Love the journey

J.K. Rowling was turned down by 12 publishers before Harry Potter��was finally accepted for publication. Margaret Mitchell���s Gone With the Wind��was turned down by 38. The list of bestselling books that were initially rejected by dozens of publishers is a long one.

My point: Rejection does not equal failure, nor does acceptance guarantee success. Ask yourself: If you knew your book would never be accepted for publication, would you still write it? Do you believe enough in what you have to say to write for an audience of one? Whether it���s writing a book or any other challenge, you need to love the journey���and value it more than the destination.

John Lim is a physician. His previous articles include Yielding Clarity,��Grab the Roadmap��and��Bearing Gifts . Follow John on Twitter @JohnTLim .

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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California Dreamin’

WHEN I WAS 10 years old, my Dad got a job offer in California. It was the early 1960s, we were living in Ohio and the local economy wasn���t doing very well. At the time, California was so desperate for factory workers that employers would run help wanted ads in local newspapers across the country.

My Dad, who was a machinist, answered one of the ads by simply placing a phone call to the employer. He was offered a job on the spot. The company paid all our moving expenses. Once we arrived in California, we stayed in a hotel, paid for by my Dad���s new employer, until we found a place to live.

It seemed like we had landed in paradise. I saw the ocean for the first time, there was an abundance of beautiful palm trees, no more bruising cold weather, and plenty of things to see and do. What���s not to like about California? It was a fresh start for our relatively young family.

A few years later, my parents owned a four-unit apartment building. My Dad was working six days a week and my mother was employed, too. We had come a long way from our small starter home in Ohio and the constant threat of layoffs.

We were joined in California by other family members: aunts, uncles and cousins. Many found new opportunities and a better quality of life. For instance, my uncle, who was a bartender in Ohio, was able to own his own bar in California.

California has the fifth largest economy in the world, just ahead of the U.K. The state has 12% of the U.S. population, but contributes 16% of the country’s jobs. It���s No. 1 in the nation in agricultural output.

Still, today, it���s a different story for the middle class in California. Many people are struggling because of the high cost of living. Housing is very expensive and it keeps rising. As Forbes noted, ���It���s true that workers in California earn 11% more than their counterparts nationally. But that amount is not enough to make up for mortgage payments and rents that are 44% and 37% higher (respectively) than the national average.���

Indeed, according to Zillow, ���The median price of homes currently listed in California is $525,000, while the median price of homes that sold is $491,100.��� The rental market for homes and apartments is also expensive. The median rent for an apartment is $2,426 in California.

The bottom line: There���s not enough affordable housing for the 40 million people who live here. It���s one of the many reasons we have the highest homeless rate in the nation and the highest total homeless population.

Many people with well-paid jobs who want to own a home are forced to drive long distances to work. A whole segment of the population is classified as the ���working homeless.��� Some of them work two jobs, but still can���t afford a place to live.

Here are three reasons for the lack of affordable housing:

California hasn���t built enough housing to keep up with demand. The state housing department estimates we need to build at least 180,000 new housing units each year to keep up. Over the last 10 years, only half that amount were built.
Rules and regulations make it more difficult, time consuming and expensive to get new housing projects approved.
The high cost of land, labor and raw materials make it costly for developers to build.

Sadly, my relatives are no longer coming to California. Instead, they���re part of a reverse migration. They���re leaving for other parts of the country.

My niece is moving to Georgia and my nephew to Tennessee. They say the cost of living is cheaper, plus they can afford to buy a house. My cousin and her husband announced they���re leaving for Florida. They can sell their home here in California and buy a cheaper one in Florida, and still have plenty of money left over. My sister and brother-law are also planning to leave���for the same reason: ���It���s too expensive here.���

One of the things my parents��� generation had in common was access to affordable housing. My aunts, uncles and cousins all owned their homes. They didn���t have to jeopardize their other long-term goals to buy a house.

The current generation no longer embraces California like my parents��� generation did. Not many of my relatives are left in California. But I���m not going anywhere. I have too much history here���and I can���t leave it behind.

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 Wrong Approach,��Before You Leave��and Better to Be Rich? ��Follow Dennis on Twitter��@DMFrie.

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Farewell Money

FROM THE LOFTY perch of old age, and after a lifetime of thrift, I declare that I am qualified to comment on how not to waste money.

We���ve all heard the reports: Most Americans live paycheck to paycheck, a large number can���t come up with $400 for an emergency, and there���s no money to save for retirement and other goals.

Most of that data comes from surveys where people are, in effect, saying they don���t have enough income. My curmudgeonly reaction: Stores, fitness centers and entertainment venues are packed with shoppers, many of them buying unnecessary goods and services. If three-quarters of Americans are living paycheck to paycheck, how can they afford to spend like this? It���s a funny thing: I have yet to see Warren or Bill in one of the many local spas.

Most Americans live like no other people on earth. We have more and bigger stuff: Larger houses, bigger vehicles, more shoes. And, in my not so humble opinion, we can���t tell the difference between needs and wants, between necessities and desires���and we sure can���t defer gratification.

All this leads me to one conclusion: We���re unable to control our spending or manage our money. Here are 16 things that this 75-year-old considers big money wasters:

1. Tattoos. They���re an admitted obsession of mine. What will they look like when you���re my age? From what I���ve heard, a good tattoo artist charges $200 an hour.

2. Vacations.��Hey, everyone needs a break. But you don���t need to go into tuition-level debt to have a good time. Your kids will survive if they never visit the Magic Kingdom.

3. College.��Picking a college involves many factors. Affordability is one that���s often overlooked. If the cost of the school you choose will land you in debt, you���d better have a plan for paying it off. Don’t mortgage your future, just so you can have a prestigious decal on your car window.

4. Restaurants. Eating out, or buying $4 designer coffee, is expensive and���wait for it���it���s also a luxury. Skip that daily $4 coffee and after 30 years you���ll have more than $121,000, assuming a 0.5% monthly return.

5. Opportunities lost. We do it every day by failing to grab the employer match on our 401(k) plan, not investing in a tax-free Roth IRA, failing to fund a flexible spending account to pay medical costs with pretax dollars, and withholding too much from our paycheck, so we���re essentially making an interest-free loan to the IRS.

6. Transportation.��You don���t ���need��� an SUV or $40,000-plus pickup truck to get from A to B. My four kids grew up riding in our 1972 Duster. Now they, too, all have trucks or SUVs.

7. Credit cards.��When people say they live paycheck to paycheck, does that include purchases put on credit cards that aren���t paid off that month? In that case, they���re spending more than their paycheck���and what they buy will cost them the purchase price, plus a hefty interest rate.

8. Lottery.��The lowest-income groups spend the most on lottery tickets, wasting hundreds of dollars a year���about the same as that $400 emergency fund they don���t have. Not to worry: 60% of millennials think winning the lottery is part of a wise retirement strategy.

9. Clothing.��My new condo has two bedrooms and three walk-in closets, two of them larger than the bathroom in my old 1929 house. The average adult spends $161 a month on clothing. We are obsessed with keeping up with the latest fashions and ensuring nobody sees us in the same clothes twice.

10. Shoes. Surveys suggest the average American woman owns more than 25 pairs of shoes, which they admit they don���t need. So why buy so many pairs? It seems shopping and wearing trendy stuff makes us feel good.

11. Tchotchkes and stuff. Clean out a house after many years���which my wife and I just did���and you often hear the words, ���Where did we get that?��� Though relatively inexpensive per item, tchotchkes and similar stuff cost money���and it all adds up.

12. Failing to look ahead.��Henry Ford said, ���Thinking is the hardest work there is, which is the probable reason why so few engage in it.��� I still marvel that people spend so little time thinking about retirement. After working 30 to 40 years, they reach retirement with no plan and are shocked they can���t live on Social Security alone. Planning for retirement early in your career is essential for financial security���and it isn���t that hard.

13. No backup plan.��I like to think ahead about ���what ifs��� and how I���ll deal with them. In my head, I have backups for the backups. I recently took out a large mortgage to buy a condo. Now I���m thinking, ���What if I can���t sell the house to cover the mortgage? What if I must do some upgrades to sell the house?��� I temporarily stopped reinvesting my tax-free bond interest, so I can build up more cash���just in case.

14. Holidays. Somehow, every December, financial caution goes out the window and we pay for it the following year. But my pet peeve are those inflatable characters on lawns that cost hundreds of dollars. Talk about blowing money.

15. Toys. One study shows that U.S. parents spend $6,500 on toys during a child���s upbringing. The spending is even higher for millennials, who favor ���smart��� toys���toys that do the thinking for the child. There���s something wrong with this picture. Hey, I���ll challenge anyone to a contest dropping clothespins into a milk bottle.

16. Haircuts. The average haircut reportedly costs $28.30 in a barber shop. Many men pay a lot more. Nowadays, nearly a third prefer a ���salon.��� I pay $12 at my local barber. But I���m still annoyed: My hair is disappearing, but the price is inching up.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include One Last Thing,��Over Coffee,��Get the Point��and��Poor Judgment.��Follow Dick on Twitter��@QuinnsComments.

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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Not Toast

IF YOU ASK my wife what my favorite food is, she won���t hesitate to answer: It���s avocados. I make a large bowl of guacamole almost every week. Maybe that���s why I take offense when I read articles saying avocado toast is the reason millennials aren���t saving for retirement.

Avocado toast has a bad reputation with personal finance writers, because it���s an expensive and favorite brunch choice, especially among my generation, those born in the 1980s and ’90s. Yes, they may have a point. There���s likely to be a time in your life when you need to cut back on expensive brunches and put that money toward other priorities, like paying down student loans or building up an emergency fund.

But what if your finances are in order? We���re constantly told to ���pay yourself first.��� The first thing I do with my paycheck is max out my retirement account contributions. On top of that, my bank regularly deducts a set amount for my other goals. After those various deductions have been made, often without my noticing, I���m free to spend the leftover money as I wish. Whether I want to spend it on avocado toast or at the movies, the choice is mine. I feel this is a less onerous way of managing my monthly cash flow, plus it means I get greater enjoyment out of the things I buy, because I know I can afford them.

Did you read bestselling author Seth Godin���s recent blog post on the��avocado principles? It inspired me to ponder the unique relationship between avocados and our financial goals:

Plan ahead.��To make a great bowl of guacamole, you have to think ahead. If you wait until the day you need to mix the ingredients, you won���t find perfect avocados at the grocery store. Similarly, to achieve your financial goals, you must plan ahead. The oft-repeated truth is that, when it comes to saving for retirement, the earlier you start, the better.

Be patient.��If you cut into an unripe avocado, it���ll be hard and won���t taste good. You have to be willing to wait an extra day or two for it to be just right. Similarly, when you���re on the verge of achieving a financial goal, don���t act too hastily. Your last few working years prior to retirement are likely to be your highest earning years. These last additions to your nest egg can be critical to reaching your goal.

No shortcuts.��When making guacamole, don���t put the ingredients in a blender and make the dip perfectly smooth. Take your time to carefully mix them together by hand to get a chunky masterpiece. In investing, the same is true: There are no shortcuts. If an investment opportunity sounds too good to be true, it probably is. Make decisions based on research and invest for the long-term.

Just buy more.��Guacamole is a hit at every party, and you don���t want to run out. Buy more avocados than you think you���ll need. Along the same lines, when planning for retirement, it doesn���t hurt to save more every year than you think you���ll need. Better to have a surplus of retirement savings to make sure you don���t run out.

Spread the love.��Since you have an abundance of avocados, share them with your neighbors. The act of making food and sharing it with others goes back to the beginning of time. You can do the same with your retirement income. Take your loved ones on vacation. Make an estate plan that allocates money left over when you die to those you love. You can also leave money to causes you want to support. After all, you can���t take the money with you. Ditto for your avocados.

Ross Menke is a certified financial planner and the founder of Lyndale Financial , a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross���s previous blogs include Cash Is King,��More to Come,��Pass It On��and��A��Great Gift . Follow Ross on Twitter @RossVMenke .

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After the Windfall

A FEW WEEKS ago, life changed for 24-year-old Manuel Franco of West Allis, Wisconsin. The winner of a recent Powerball lottery, Franco took home $326 million���and that���s after taxes. With a sum that large, it shouldn’t be hard for Franco to make his winnings last a lifetime.

And yet, more often than not, such windfalls deliver heartache rather than happiness. Consider Lara and Roger Griffiths, an English couple who, in 2005, won the equivalent of $3.2 million from their local lottery. After celebrating with a spray of champagne, they both quit their jobs to go on a buying spree: three houses, sports cars, jewelry and vacations in Dubai, Monaco and Majorca. Result: The couple were penniless just six years later.

To be sure, the Griffiths’s story is extreme. But if you���re the recipient of a windfall���whether from a year-end bonus, stock options, the sale of a home, an inheritance or even just a tax refund���it’s important to employ a logical framework when allocating these new funds. Below is the 10-step process I recommend:

Step 1: Set aside for taxes.��If the windfall is six figures or larger, the first step is to visit your accountant. Even if the check you receive withholds some amount for taxes, that���s often just an estimate. Only your accountant knows your entire picture well enough to make an accurate estimate of the taxes owed. Take that amount and stash it in a separate FDIC-insured savings account.

Step 2: Diversify.��If your windfall came in the form of company stock, it may be tempting to hold onto it. After all, you know the company and you may incur further taxes to sell your shares. But I would encourage you to think about it this way: If you didn’t already own the stock and didn’t work for the company, how much of this one company’s shares would you buy? I wouldn’t let any single company���s stock account for more than 5% or 10% of your net worth.

Step 3: Eliminate high-interest debt.��If you’re carrying credit card debt, pay it off. If your credit cards charge 18%, which is the current average, you���ll earn the equivalent of a guaranteed, tax-free 18%.

Step 4: Evaluate lower-interest-rate debt.��While I wouldn’t hesitate to pay off high-rate debt, you don’t need to eliminate��all��debt. If you have a very low-rate mortgage or car loan, it might make sense to keep the loan, even if you could afford to pay it off���for two reasons.

First, you might be able to earn more, over the long term, by investing those funds. Second, and maybe more important, it buys you flexibility. You can always pay down debt later, but���at that juncture���it might be much harder to take out a new loan if you find yourself short on cash. Banks, it���s often said, prefer to lend money to people who don’t need it.

Step 5: Set aside for charity.��If your windfall will push you into a higher tax bracket, charitable gifts are an effective way to moderate the resulting tax bill. As I���ve��recommended��in the past, a donor-advised fund is an easy, flexible and effective way to support charitable causes, while also immediately cutting your tax bill.

Step 6: Consider gifts to family.��Depending on the size of your windfall, you might make gifts to family members���but do so carefully. Think about equity among recipients. Also be sure to set expectations. Is this a onetime gift or the start of regular, annual gifts? Whatever your plan, everyone will be happier if you communicate it upfront.

Step 7: Do something meaningful.��Economists caution against ���mental accounting������that is, treating money differently depending on its source. To a purely rational mind, money should be fungible.

But most people aren’t purely rational, and that’s okay. I think it’s completely reasonable to use part of a windfall to purchase, or do, something that carries sentimental value. You could, for example, use part of an inheritance to buy something special for your home, which will serve as an ongoing reminder of the person who made the bequest.

Step 8: Do something frivolous.��As important as it is to do something meaningful, I also advise doing something frivolous. Why? Because it is largely unavoidable. It’s the rare person who won’t be tempted to do something fun. Recognizing that reality, I think it’s better to budget for this. That’s what got Lara and Roger Griffiths in trouble: If it had been just the McMansion, or just the sports car, or just the jewelry, they probably would have been fine. My advice: Have fun���but within a prescribed limit.

Step 9: Save the rest���slowly and with an eye toward tax-efficiency.��After making each of the above allotments, you’ll want to save the rest. But don’t rush to invest it. With stocks, bonds and real estate near all-time highs, I don’t see any urgency to jump into the market.

Instead, give things time to settle down and think through your long-term plan. Because your tax rate may be quite a bit higher in the year you receive a windfall, you’ll want to avoid strategies that���ll boost your tax bill and you might seek ways to trim taxes, such as maxing out tax-deductible retirement accounts.

Step 10: Keep a low profile.��If you saw Lara and Roger Griffiths on the day they won the lottery, they were anything but��discreet. Nothing good comes from drawing attention to yourself. Indeed, it only makes it harder to follow the nine earlier steps carefully, methodically and on your own terms.

Adam M. Grossman���s previous articles��include��Out of Bounds,�� Not So Easy ,�� Many Happy Returns ��and�� Oracle of Boston . 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: It accepts donations, ��it runs advertisements served up by Google AdSense and it participates 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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Calling the Shots

HOW WE CHOOSE to spend our time and money is a declaration of what we deem important. A modest example: We might enjoy watching a wide array of cable channels, while caring little about the clothes we wear, and that���s reflected in our costly cable bill and minimal spending on clothing. And there���s nothing wrong with a choice like that���if it is indeed what we want.

But is it? Often, the things we consider important���and hence how we lead our lives and how we spend our money���aren���t the product of our own careful contemplation. Instead, they reflect the influence of marketers, the media, family and friends. We aren���t pursuing the life we want, but rather the life we���ve been told we should want.

We are especially vulnerable to this when we���re younger. Here are just five of the messages we grow up hearing:

A better life is just one exam, one college acceptance, one promotion and one pay raise away.
If we work hard today, we���ll get our reward later���not just more money, but also time to kick back and relax.
Possessions���especially new, expensive possessions���bring happiness.
Money is the yardstick by which we measure success.
It���s crass to talk about how much we earn and how much money we have.

What are the consequences of these five messages? Because we can���t talk about how much money we have���and we don���t really know how much others have���we spend money to signal our financial success to others. But, of course, the more we signal, the less money we actually have.

Meanwhile, we���re constantly striving to get ahead. That���s great if we���re engaged in work we truly enjoy. But there���s a risk we get no great pleasure from either the work or the reward, and instead find ourselves on the hedonic treadmill, pursuing goals we believe will make us happy, but ultimately leave us no more satisfied than before.

What���s the solution? Instead of buying into the messages that are foisted upon us, we need to figure it out for ourselves. This, alas, may require not just days or weeks, but decades.

Partly, it���s because experience is a great teacher, but a slow one: It often takes many years to learn what does and doesn���t make us happy. But I also believe aging itself changes our perspective, as we come to grips with our dwindling time. That changing perspective has three key components:

1. We want to make the years ahead as memorable as possible.

After thousands of disappointing purchases, many of us see a familiar pattern: Our excitement over the new living room furniture and the latest remodeling project quickly wanes, and soon we���re hankering after something else. But our shrinking time horizon also plays a role. We don���t want to waste precious time looking after these possessions and, frankly, we have fewer years left to enjoy them.

Instead, we want to make our remaining time as special as possible���and that drives us to focus less on buying possessions and more on purchasing experiences, especially experiences enjoyed with friends and family.

2. We want to devote our days to activities we���re passionate about.

Looking back, we realize all the promotions and pay raises haven���t left us permanently happier, and the spells of relaxation weren���t much of a reward. Worse still, we often spend a good portion of each workday on nonsense���nonsense wrought by others���and this rankles ever more as we grow older and time grows shorter.

The fact is, we���d much rather devote our days to activities we think are important. This is what drives many folks to change careers late in life and perhaps even launch their own business. It also fuels the desire to retire, so we can call the shots on how we spend each and every day.

3. We care less about how we���re perceived���and more about our own peace of mind.

Early on, we might have wanted an endless stream of new possessions, so we could signal our success to others. But now, it seems like a tiresome waste of time and money. We���d rather the financial security of a fatter nest egg than the silly pleasure of trying to impress others.

Admittedly, it���s hard to completely abandon material wealth as a yardstick of success. But again, experience helps. We have plenty of friends who are richer but seem to trudge through life. We can recall earlier times when we had far less money but were just as happy. But mostly, we have a better sense for how much we need to lead the life we want���and we���re pretty sure a bunch more money wouldn���t make a whole lot of difference.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook . ��His most recent articles include April’s Hits,��Cover Me��and��Singled Out. Jonathan’s ��latest books:��From Here to��Financial��Happiness��and How to Think About Money.�� Check out his just released��podcast with Creative Planning’s Peter Mallouk.

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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