Jonathan Clements's Blog, page 368

Getting Real

FOR AS LONG as I can recall, I���ve received unsolicited advice on what I should study in school, when I should get married, when I should pop out kid No. 1���and how I should spend my money. Regarding this last item, it seems there���s a lot of financial advice out there from people who enjoy a level of financial security I’ll likely never experience, unless I strike it lucky with the Powerball.

Many advice columnists just haven���t caught up with the soaring��cost of living and student debt crisis that confront young people. Result? We read articles about how much money we should have saved by age 30���and we completely freak out. If you’re tired of reading perfect money advice for an imperfect world, here’s how I learned to handle my cash:

1. Stop clubbing every weekend.��As the Norwegian band A-ha sang years ago, “The sun always shines on TV.” In the movies and on television, close friends meet for lunch at charming bistros and party all night at clubs, where the cheapest martini sets them back $15.

But in real life, it often feels like the sun only occasionally breaks through the bleak clouds of “let me check my bank account before I grab a happy hour drink with co-workers, so I don’t risk an overdraft.” I spent most of my early 20s wondering if I had enough dough left at the end of each week to make it to those coveted happy hours.

Even then, I was completely blowing pretty much every paycheck. I always made sure I had enough for rent, but I wasn���t saving at all. It took a medical emergency���for which I didn���t have the money���to finally wake me up to reality: Saving is not an option, but a necessity��for survival.

I was lucky. I had someone to help me out, while I got my financial act together. But I never wanted to feel that scared again. Trust me on this: If you���re spending all or most of your extra money on drinks and dinner, you���ll have a similar moment. Eating out and drinking out are incredibly expensive, no matter how good you think you are at finding deals.

Limiting myself to going out once a week was a good start, while I worked to get my bad habits under control. Using cash���instead of my debit and credit cards���was helpful, too, because I was cut off when my purse was empty. What worked best, though, was the realization that standing around on a crowded dance floor, while people spilled vodka tonics down my shirt, was overrated.

2. Dress for success���for less. Some seasoned professionals will tell you that you need to dress for the position you want, not for the one you hold currently. Buy if you���re realistic, you quickly realize that high fashion tends to pair with an entry-level wage like corn on the cob pairs with a mouth full of braces.

Still, I needed to dress far more professionally than I could afford. My solution? A lovely thrift store down the street. The value of thrift shops cannot be��overstated. The clothes sometimes smell like mothballs, but we all learned how to operate the coin laundry while in undergrad, right? I’ve scored many a designer suit simply by scoping out thrift stores in wealthier areas of town.

3. Save it before you spend it. Not all financial planning advice from the pros benefits only the silver-spoon set. One gem I came across: the principle of paying yourself first.

One of the best financial choices I ever made was starting a separate savings account, where part of my paycheck automatically goes every time I���m paid. This is separate from my checking account, so most of the time I don’t even look at the money unless I truly��need it. For those who hit payday and think they can buy everything they want for the next few days, it can help you avoid pulling all��your money out willy-nilly using a debit card. Instead, wear your ever-growing monthly account statements like a badge of honor.

Additionally, like many in today’s gig economy, I have a number of side hustles. My advice: Open both a savings account and an IRA. You can even have the funds from one gig sent to that savings account via direct deposit. If, when tax time comes, you find you need to decrease your tax liability, you can simply contribute some of those savings to your IRA���and claim your tax deduction.

4. Figure out what your priorities are���or should be. If anything infuriates me about the financial advice I���ve seen online, it’s the whole, “Put 10% of your income into savings and spend no more than 28% on housing.” Right. Have these advice columnists paid rent��in the modern world?

I could get my rent down close to 30%���if I were willing to live in a part of town where I’d need multiple deadbolts. I prefer feeling safe, so I pay more.

Pick your battles. Figure out what���s a priority for you���or, better still, what should��be a priority. (Please revisit the ���stop clubbing every weekend��� section.) Bodily safety is a human need. Eating (reasonably) is a human need. Cut out the things that don���t fulfill those basic needs before you cut out the things that do.

Kate Harveston is the editor of a women’s health blog, So Well, So Woman, and a journalist at a variety of online publications. She writes about wellness, politics and finance, and how those elements often intersect. You can��subscribe to��her blog��and follow her on Twitter��@KateHarveston.

The post Getting Real appeared first on HumbleDollar.

March’s Hits

WHEN I PUT together HumbleDollar’s monthly list of the most popular blog posts, I always ask myself, “What do these articles have in common?” And almost always, there is no common theme, other than���I like to think���a combination of sprightly writing and financial insight. I hope you agree. Here are March’s seven most popular blogs:

Twelve Principles
45 Steps to Success
How to Blow It
Labor of Love
Up to You
Higher Taxes?
Lighten the Load

During March, the site also saw heavy traffic for HumbleDollar’s new nine-step portfolio building guide. Overall, it was easily the best month in the site’s 27-month history, with the number of page views up more than 50% from March 2018.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include Money Matters and��Got to Believe . Jonathan’s ��latest book:��From Here to��Financial��Happiness.

HumbleDollar participates in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and then purchase books or other merchandise, you don’t pay anything extra, but we make a little money. HumbleDollar has no other affiliate marketing relationships.

The post March’s Hits appeared first on HumbleDollar.

When in Doubt

HAVE YOU EVER struggled with a financial decision? If you’re like most people, I suspect that the math wasn’t the hard part. Instead, more often than not, what makes financial decisions a challenge is the subjective element.

Financial decisions involve lots of variables���your future income, interest rates, housing prices, tax rates and more. We can make reasonable forecasts, but ultimately these decisions require us to make judgment calls without complete information, and that can be unnerving. In her 2018 book,��Thinking in Bets, retired poker champion Annie Duke offers these two strategies to help make better decisions in situations like this:

Never be too sure. As a poker player, Duke knows the importance of subtle cues. For that reason, she has a number of recommendations on how to communicate better.

For example, whenever you’re discussing a financial question���whether it’s with your spouse, a business partner, a lawyer or a financial advisor���avoid asking the question, ���Are you sure?��� While that seems like an innocuous question, Duke suggests this alternative: ���How sure are you?���

This accomplishes two things. First, it acknowledges the reality that there are very few absolute truths when it comes to financial decisions. Second, it allows for a healthier exchange of ideas. The question ���are you sure?��� puts the other person on the defensive. It’s a yes-or-no question and doesn’t let someone express a less-than-certain level of confidence without feeling defeated. But the alternative formulation���”how sure are you?������allows for a more open discussion. That, in turn, may lead to a more well-thought-out decision.

How do you apply this principle to your finances? When you’re making a financial decision, acknowledge that you can’t be 100% certain how something will turn out. Instead, think in terms of a range of possible outcomes. Ask yourself, ���What could go wrong?��� Try to quantify what that would mean to you.

For example, if you expect an investment to return about 10%, ask yourself, ���What would happen if, instead, it lost 10% and perhaps more?��� Would that change your decision? Or might you take additional steps to protect yourself from that outcome?

To be sure, you can’t protect yourself against every extreme scenario���a Great Depression-style 90% market crash, for example. But it’s reasonable, I think, to imagine a repeat of relatively recent events, such as the 10% inflation we saw in the 1970s or the 50% market declines we’ve seen twice in the past 20 years.

Avoid resulting. Among poker players, there���s a phenomenon known as ���resulting.��� This occurs when players mistakenly assess their strategy in a game based on the outcome. For example, if a player wins, he might conclude that he played his hand well. While that seems logical, it’s a mistake, because it overlooks the potential role of luck. It also overlooks the fact that other players might have played poorly.

In other words, just because something turns out well doesn’t necessarily mean that you were following a good strategy. And just because something turns out poorly doesn’t necessarily mean you were following a bad strategy.

How should you apply this principle to your finances? To avoid resulting when evaluating past decisions, keep a journal in which you document all of your major financial decisions. It doesn’t need to be fancy. Just note the basic facts, along with your reasoning, so you have it for future reference. This will enable you to review the results of your decisions, without rewriting the facts in your mind to fit the outcome. You should also be careful of resulting when evaluating others’ decisions. If an investment manager delivers great results, don’t ascribe their success to skill alone. Instead, evaluate their strategy and ask, ���How much was luck and how much was skill?���

Adam M. Grossman���s previous articles��include Rolling the Dice,��Get a Life,��Higher��Taxes��and�� Moving Target . 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 participates in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and then purchase books or other merchandise, you don’t pay anything extra, but we make a little money. HumbleDollar has no other affiliate marketing relationships.

The post When in Doubt appeared first on HumbleDollar.

Money Matters

WE MAKE countless decisions���financial and otherwise���with little or no thought to the dollars at stake:

We purchase items that we know are overpriced and almost guaranteed to lose value, but we do so happily, because they have a meaning for us that���s far greater than their price tag. Think of artwork and vacation souvenirs that are purchased because they remind us of moments we treasure.
We prize family possessions for their sentimental value, even though they typically have scant financial worth. Indeed, after a family member dies, often the biggest squabbles are over possessions with no resale value.
We spend endless dollars on our family, while rarely���if ever���asking whether we���re wasting money.

None of this is especially surprising or, I���d argue, irrational. We���re talking about the pursuit of happiness���and that involves making choices where we receive greater value than the dollars we’re forking over.

Instead, what���s surprising is this: When that emotional resonance isn���t there, we typically default to money as the yardstick for measuring someone or some thing���s worth. We assume successful entrepreneurs and Hollywood stars must���in some sense���be special, simply because they have or earn a lot of money. We assume items are desirable, simply because they come with a large price tag. These are, to borrow from a recent piece by HumbleDollar contributor Jim Wasserman, Veblen goods.

It���s hard to shake this way of thinking, even though it runs contrary to what we experience every day. We don���t think our older daughter is superior to our younger son, just because she earns more money. We don���t have the urge to throw out every household possession that would command little or nothing on eBay. When we think about the people and things in our lives, we think in absolute terms. If we care about them, we care about them���period���and not on a scale of one to 10.

But when we turn to the larger world���the world we don���t know personally���the 10-point scale comes into play. Our thinking goes from absolute to relative. We measure everything in dollars���and we assume the more, the merrier. What if we have less than others? We’ll often feel less happy.

This is the warped thinking that drives the Easterlin paradox, named after economist Richard Easterlin. At any point in time, those in society with higher incomes tend to say they���re happier. What if incomes rise, so the rest of us start enjoying the standard of living previously enjoyed only by the wealthy? Society grows no happier, because there are always those who feel relatively shortchanged.

This was confirmed yet again by the latest General Social Survey. In 2018, 31% of Americans said they were very happy, barely higher than the 30% who described themselves that way in 1972, when the General Social Survey was first conducted. Yet, over this 46-year stretch, U.S. inflation-adjusted per-capita income rose 131%. We���re living more than twice as well as we were in 1972, but apparently we���re no happier.

How can we overcome this financial relativism���and feel more content with what we have? While anecdotal evidence is usually the scourge of rational financial thinking, this is one occasion when it may actually help. By pondering the people and possessions in our own lives, we may realize that the connection between money and happiness is awfully tenuous���and those we perceive as being more fortunate may be no happier.

Follow Jonathan on Twitter�� @ClementsMoney ��and on Facebook .��His most recent articles include 45 Steps to Success,��Got to Believe��and Labor of Love . Jonathan’s ��latest book:��From Here to��Financial��Happiness.

HumbleDollar participates in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and then purchase books or other merchandise, you don’t pay anything extra, but we make a little money. HumbleDollar has no other affiliate marketing relationships.

The post Money Matters appeared first on HumbleDollar.

Living Small

WE MOVED from a 2,700-square-foot home in the U.S. to an 850-square-foot apartment in Granada, Spain. Nothing makes you come to grips with how much stuff you have like moving to a small European apartment. We ended up taking less than a third of our clothes, along with other ���necessities,��� in four large pieces of luggage.

The process was both hard and liberating. As the old saying goes, they may be called ���possessions,��� but do we possess them or does our stuff possess us? Moving compels us to face our true nature, as reflected in the accumulated artifacts of our past choices. It also affords the chance to purge the burden of those past choices, giving us a rare opportunity for liberation.

In the process of performing triage on our life, we came to learn much as we adjusted to ���living small.��� Living small doesn���t mean living less. If anything, we feel like we now live more���for six reasons.

1. There���s the liberating satisfaction of knowing we can carry on with life, without having to own what is advertised as a ���must have.���

2. Living small often eliminates the temptation to shop, because there simply isn���t room. For any potential new item, we are compelled to weigh whether the item is worthy of taking up residence in our home���and what has to depart to make space.

3. Less time maintaining an expansive home means more time for activities we truly enjoy���things like writing, tennis, reading, sightseeing and spending time with friends. Living for more experiences and less stuff also means fewer wasted resources���and less stuff that���ll eventually become junk taking up space in landfills.

4. Less indoor space induces us to go outside more, making us healthier mentally and physically. Most Spaniards spend a lot of time outside, especially when the weather is better. It���s common to see people of all ages sitting outside until late at night, visiting with friends and family. Many street corners are even designed for this sort of rendezvous, with numerous benches or small shaded squares.

Less space at home also means we often spend time at restaurants, having tapas with friends over the course of three or four hours and enjoying the food, wine, atmosphere, weather and good company. What if we eat at home? Having a smaller kitchen forces us to go to the market more often, but we end up buying less.

5. We have no car. That means we walk more and take public transportation. Because we now walk everywhere, we���re in much better shape, especially living at the foot of the Sierra Nevada mountains, which is a hiker���s paradise.

6. We feel good that we���re doing our part for the environment. It isn���t just living without a car. Each small room in our apartment has an individual air conditioning or heating unit. It takes fewer resources to heat or cool one room, compared to a U.S. home with 20-foot ceilings and central air conditioning that runs day and night. Relative to apartments, free-standing houses are also less energy efficient, with those unused side paths between houses allowing heat to escape.

Jiab Wasserman recently left from her job as a financial analyst at a large bank at age 53. She’s now semi-retired. Her previous articles include This Old House,��The Gift of Life��and��Odds Against.��Jiab and her husband, who also writes for HumbleDollar, currently live in Granada, Spain. They blog about downshifting, personal finance and other aspects of retirement���as well as about their experience relocating to another country���at��YourThirdLife.com.

The post Living Small appeared first on HumbleDollar.

Better Than Golf

FOR ME and many other older baby boomers, the traditional retirement model doesn���t work. We���re healthier and living longer than prior generations. Most of us don���t want to sit in a rocking chair, gaze at the sunset, play golf continuously, eat boring lunches at the senior center or live like we���re on vacation every single day.

Instead, we want to remain relevant, with meaning and purpose in our lives, and we want to continue to learn and grow. Indeed, many studies, including one at Oregon State University, have found that people who retire early, and don���t remain active and engaged, tend to die sooner.

Years ago, I thought I���d retire in my mid-60s from my financial planning business and, together with my husband, spend my remaining decades focusing on family, volunteering and travel. But my plan was turned upside down when my husband died two months after being diagnosed with cancer. That was right after my 60th birthday. His passing was the start of my journey into the wilderness of grief and transformation���and ultimately led to my encore career.

Soon after I lost my husband, I started focusing my financial planning practice on helping other widows, including writing articles about their financial concerns. I was asked to contribute a regular column to Investment News,��a publication for professionals. That, in turn, spurred me to write a personal finance book for widows, which garnered yet more attention.

Many invitations to speak followed. I agreed to talk at events across the country. I wanted to help other widows, while also advising financial professionals about the special challenges facing women who suddenly find themselves on their own. Problem is, I was losing money on every event I did, because I was paying my own travel expenses. Sure, I was selling books at these events. But that income was paltry compared to the travel costs and the revenue I lost while I was away from my primary job.

I decided to go back to school, enrolling in the local Speakers Academy of the National Speakers Association. There, I honed my presentation skills and learned how to make a business from my speaking. Six years ago, I sold my financial planning business, so I could spend more time on speaking, writing, mentoring and research. Now age 72, I love my encore career. Here are seven of the benefits, financial and otherwise:

I get to help others, while receiving income for work I love.
I was able to delay Social Security until age 70, increasing my monthly income by 32% compared to the benefit I would have received at age 66.
I continue to add to my financial net worth. Even though I���m over age 70��, I���m still contributing to both a solo 401(k) and a Roth IRA, and I���ve increased my ability to help my children and grandchildren financially.
I get to travel to fun cities, where I meet interesting people���and, these days, my sponsor pays most expenses.
I work as much or as little as I want. Today, I only take on projects that I���m interested in.
I get to use skills honed over a lifetime, but in a new creative way.
My encore career keeps my brain active and feeds my soul. I feel I���m doing meaningful, fulfilling work.

That said, there are two drawbacks. First, I have a bit less flexibility. I try to monitor my calendar carefully and not overcommit. Second, the travel can be taxing. Flights are frequently canceled, rescheduled or delayed. I���ve learned the solution is to allow extra time, just in case.

Interested in an encore career? Think about transitioning over time, rather than jumping right in after leaving your job. Perhaps you can downshift from a fulltime professional position to a part-time role, maybe staying on as a consultant or working on special projects. That way, you can remain engaged with your current work and earn a partial paycheck, while gaining free time to pursue your new career.

Kathleen M. Rehl authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows . She walks an hour or more most days, practices gentle yoga, and enjoys art and music festivals. You can learn more about Kathleen and her work at KathleenRehl.com.

HumbleDollar participates in��Amazon‘s Associates Program, an affiliate marketing program. If you click on this site’s Amazon links and then purchase books or other merchandise, you don’t pay anything extra, but we make a little money. HumbleDollar has no other affiliate marketing relationships.

The post Better Than Golf appeared first on HumbleDollar.

Getting Schooled

STICKER SHOCK is common when families begin the college search���with good reason. According to the U.S. Department of Education���s National Center for Education Statistics (NCES), inflation-adjusted college costs have more than doubled over the past 30 years.

Annual tuition, fees, room and board for fulltime undergraduate students at four-year colleges averaged $26,100 in 2015-16, the last year for which NCES data is available. That average drops to $22,400���if you include junior colleges. On the other hand, private colleges on their own averaged $43,100.

So is all hope lost when paying for college? Absolutely not.

NCES data also indicate that 83% of new college students receive some financial aid, up from 70% 15 years earlier. In other words, the vast majority of first-year college students receive financial help���more than 2 million students each year.

You might presume this help is mainly in the form of student loans, which merely postpones paying for college. But in fact, scholarships and grants���money that doesn���t have to be repaid���constitute the bulk of financial aid. NCES data show that first-year college students receive an average $7,700 in grants and $3,200 in loans. The $10,900 in total support covers 48% of the $22,400 average annual cost.

The biggest source of grants is���surprisingly���neither the federal nor state governments, but rather the colleges themselves. They provide about $4,600, or 60% of the grant total. Colleges effectively offer a significant discount off their published list price to almost half of new students. For example, many of my kids��� friends received in-state tuition equivalency when attending out-of-state universities.

To be sure, these various averages may be a little misleading. The more expensive the college, the larger the amount of grant money that���s likely to be awarded���and this may somewhat skew the averages. Still, it all adds up to serious dollars. CollegeBoard.org estimates that last year $184 billion in total aid was distributed, including $99 billion in grants, $55 billion in loans and $30 billion in other direct forms of support. In effect, students receive more than $100 billion each year in free money.

Want a piece of the action? You might think that the easiest route is to have a student with extraordinary talent in, say, athletics, music or dance. This couldn���t be further from the truth. Only about 3% of elite athletes make NCAA scholarship-eligible teams, plus those receiving athletic scholarships capture only a small piece of the total scholarship pie. The NCAA reports that more than 150,000 athletes receive $3 billion per year in scholarships. This works out to only about 2% of the 7 million-plus students receiving scholarships and just 3% of the total money.

Instead, the best path to financial aid is clearly through strong academics���achieving A grades and high test scores on the SAT or ACT. Colleges are looking for the best students. Meanwhile, poor performers will be challenged to gain admission, let alone receive aid. Good students from families having financial need will generally benefit more from grants and scholarships. But need isn���t mandatory to receive financial support. Remember, more than 80% of new students get some help.

There are plenty of resources to assist families, including the Education Department���s StudentAid.gov, Edvisors.com��and FinAid.org. Many college websites offer calculators that estimate potential financial assistance. Colleges also have financial counselors ready to help.

NCES data indicate that roughly 20% of families never apply for financial aid. This suggests that most families that seek financial aid receive some assistance. But clearly, the onus is on families to apply. Make no mistake: College is expensive. But the nearly $200 billion per year of available aid can go a long way to alleviate the initial sticker shock.

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 two children are both recent recipients of merit-based financial assistance to help with college costs. His previous articles were Bracketology, Don’t Concentrate and��No Free Ride.

The post Getting Schooled appeared first on HumbleDollar.

Better to Be Rich?

I���M LOOKING at my credit card statement and I have a month-end balance of $3,475. My other credit card has almost $1,200 owed on it. My property taxes, automobile insurance and home insurance are due. I have an appointment in a few days to see my lawyer about my trust. He charges $450 an hour. Rachel and I are going on two weekend getaways in the next two weeks.

But I���m not rattled about all these expenses. In fact, I feel confident about my financial situation. That prompted me to ask myself, ���Am I rich?��� I don���t feel rich, but���compared to many others���no doubt I am. Here are the perks that come with money���some available to more affluent Americans, some only enjoyed by the truly wealthy:

The rich, according to research, tend to live longer. One reason: They have better health insurance, which allows them to get tested earlier and gives them access to better care.
The rich don���t need to worry about buying long-term-care insurance. They have enough money to pay for their own care in their declining years.
The rich can afford the best and most prestigious private schools for their children.
The rich can pay less for insurance policies, because they can afford the higher deductibles.
The rich can take advantage of discounts by buying in bulk and participating in special sales events.
The rich don���t have to worry about taking on college debt���unlike millions of other Americans.
The rich don���t need life insurance, though they may buy it to avoid taxes. There will be plenty of money for their heirs.
The rich don���t need loans to buy big-ticket items, so they don���t end up paying interest.
The rich will never be a financial burden to their children.
The rich can have more fun. They can buy season tickets to sporting events, travel around the world, and collect paintings or other items of interest.
The rich can make large donations to the charities and causes they���re passionate about.
The rich can put 20% down on a house, so they avoid private mortgage insurance, and perhaps even pay cash for the place.
The rich don���t suffer the financial stress that comes with meeting monthly expenses and funding retirement.
The rich have more freedom to do what they want when they want.
The rich get better rates on loans, credit cards and home-equity lines of credit, because they have a better credit history.

Get the idea? The rich derive countless benefits from their money. But don���t be too envious. There are three things in life that everyone can have���and that arguably are far more important: family, friends and experiences.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous articles include Lighten the Load,��Rescue Dog,��Little Jack��and��Cancel the Movers . Follow Dennis on Twitter��@DMFrie.

The post Better to Be Rich? appeared first on HumbleDollar.

Never Too Late

FOLKS OFTEN feel that, because they���re a certain age, their time has passed and it���s too late for them to pursue new goals, whether it���s saving for retirement or starting their dream business. But I believe we can reinvent ourselves at any age.

Last year, I listened to an NPR podcast that featured an interview with Bob Moore, founder of Bob���s Red Mill. You���re probably familiar with Bob���s Red Mill: Their products are now sold in most grocery store health-food sections. Bob told the story of how he transformed his life as a failed gas station owner by starting a side hustle milling grain. That side business now has annual revenues of more than $100 million.

It wasn���t easy. Bob faced adversity all along the way, including saving old mills from being torn down to watching the business go up in flames after an arsonist destroyed his building. What kept Bob from calling it quits? ���I began a concerted effort to make my life what I thought I was capable of doing,��� Moore says.

What���s fascinating to me isn���t that Bob and his wife Charlee built this amazing business, but rather they started when Bob was in his 50s. After the failed gas station business, he most likely could have taken the latter part of his career in a number of different directions. But instead, he took on the daunting challenge of building a business that would make far healthier foods than were currently available in grocery stores.

Bob is now 90 years old and still active, handing over his company to his employees and giving away his personal wealth. He���s a man of faith who believes in the motto ���do unto others as you would have them do unto you.���

Have you ever dreamed of starting your own business or going after a big hairy audacious goal? Start today by taking one small step toward your goal. Much like compound interest on your investments, incremental actions done repeatedly result in massive change over time.

To achieve your personal goals, try reverse engineering the task at hand. First, write down your goal. But don’t stop there. Next, write down the 10 or 20 steps it’s going to take to get there. Even the most minute details can be included, with each step getting you closer to where you want to be. As Bill Gates once said, “Most people overestimate what they can do in one year and underestimate what they can do in 10 years.”

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 Head Games,��Full Speed Ahead, Up to You��and��No Money Down. Follow Ross on Twitter @RossVMenke.

The post Never Too Late appeared first on HumbleDollar.

Rolling the Dice

IN JANUARY 1946, a man named Stanislaw Ulam found himself confined to a hospital bed, having suffered an encephalitis attack. A brilliant scientist and a veteran of the Manhattan Project, Ulam wasn’t the type to sit idly while he recuperated. Instead, after playing innumerable games of solitaire to pass the time, Ulam began to examine the statistical aspects of the game.

Among the questions he asked: How can you accurately estimate the probability of winning a game? To answer this question, Ulam ended up devising a novel statistical technique that he dubbed Monte Carlo analysis. Today, this approach is broadly accepted and widely used in everything from engineering to biology to financial planning to meteorology���and��even basketball.

How exactly does Monte Carlo analysis work? The idea is this: As long as you know the basic dynamics of how something works���whether it’s weather patterns, card games or anything else���you can use a computer to simulate an experiment thousands of times and then simply count up the frequency of various outcomes.

How is Ulam���s technique applied to financial planning? Knowing how the stock market has performed in the past, and the degree to which it varies from year to year, you can simulate the market’s future performance. But instead of focusing on the stock market’s average��annual return, Monte Carlo analysis focuses on average��multi-year returns. This allows financial advisors to reassure their clients with confident-sounding statements such as: ���I’ve tested 10,000 scenarios and can tell you that your retirement plan has a 90% probability of success.��� To see what a Monte Carlo simulation looks like, check out Vanguard Group’s retirement nest egg calculator.

While Monte Carlo analysis is widely used in financial planning, I would advise caution, for two reasons:

1. Subjective inputs. Monte Carlo simulation works well when forecasting physical or mechanical processes���things that act in predictable ways or, at least, within known limits. A card game, for example, can develop in numerous ways. Still, it’s always played with a fixed set of rules and an identical deck of cards. While you don’t know which card will come up next, you do know there will never be five aces in a deck. As a result, the set of possible outcomes is necessarily limited.

When it comes to the stock market, though, the opposite is true: An infinite combination of political and economic events���coupled with human emotions���can drive the market in unpredictable ways. In a card game, it’s difficult to know what will happen next. In the stock market, it’s��impossible��to know. And it’s not just the stock market. Lots of other variables impact the success of a retirement plan, including inflation, tax rates, interest rates and potential changes to Social Security and Medicare.

Try this thought experiment: Tomorrow morning, pick up the newspaper and ask yourself, ���How many of these stories could I have predicted five or 10 years ago?��� Not many, I suspect���and yet that���s what we are doing when we expect Monte Carlo analysis to help us forecast multi-decade retirement scenarios. To be sure, the past serves as a guide to the future, but it’s just��a guide. That’s why any simulation of the stock market rests on shaky ground, simplistically assuming that the future will mirror the past.

2. Less-than-useful output. If the inputs to a Monte Carlo analysis are subjective, the outputs are even more troubling.

First, Monte Carlo output is normally expressed as a percentage���a 90% probability of success, for example���but what exactly does ���success��� mean? It means simply that you won’t run out of money. That sounds logical. Problem is, it���s defined very literally. If a Monte Carlo simulation determines that there will be even $1 left at the end of someone’s life, that is defined as success. For a computer, that may make sense. But for a real person seeing their funds rapidly approach zero late in life, that hardly sounds like a pleasant or successful outcome. But because this is the way Monte Carlo simulations work, they may lull people into a false sense of security or, alternatively, scare the daylights out of them, when neither reaction may be warranted.

The second problem with Monte Carlo output is that, if you dig into the results, it provides a range of potential outcomes so wide that it borders on the absurd. Use a typical Monte Carlo program to simulate the growth of a $1 million portfolio over a 30-year retirement, for example, and it will unhelpfully project that your assets will fall somewhere between zero and $29 million. While this may be statistically accurate, personally I don’t find it very useful.

To be sure, Monte Carlo analysis has its place in scientific disciplines. But when it comes to retirement planning, I would urge you to be skeptical. Always look at the numbers behind the numbers���and never let any one analysis drive your financial decisions.

Adam M. Grossman���s previous articles��include Get a Life,��Higher��Taxes��and�� Moving Target . 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 .

The post Rolling the Dice appeared first on HumbleDollar.