Jonathan Clements's Blog, page 386

Newsletter No. 33

FORGET THE GOOD LIFE. Today, what many folks want is something quite different: A Good Life. Tired of running the hedonic treadmill and getting nowhere fast? Stop seeking happiness in the next promotion, pay raise and purchase—and instead try the half-a-dozen simple strategies suggested in HumbleDollar’s latest newsletter.

Behind on your reading? Our latest newsletter also includes brief descriptions and links to the 17 blogs we’ve published since our mid-September newsletter.

The post Newsletter No. 33 appeared first on HumbleDollar.

A Good Life

IS THIS A MOMENT of cultural change? I see glimpses of a new way of thinking. The New York Times recently ran articles on both the cult of thrift and the financial independence/retire early—or FIRE—movement. Words like mindfulness, purpose and meaning have gained new currency. U.S. household debt is growing, but it’s still barely higher than a decade ago. The national savings rate even shows signs of improving.

Maybe this is yet another reverberation from the Great Recession. Maybe it’s financial necessity, as Americans adjust their lifestyle to their skimpy savings. Maybe our perspective on money is changing: The young are turned off by the work world’s brutally long hours and constant layoffs, while the old are realizing how little happiness money has brought them.

Gone is the obsession with The Good Life. We were raised to think that happiness lay in material goods and moments of relaxation. But the material goods proved disappointing and those moments of relaxation left us restless. Now, what people increasingly want is A Good Life—one that’s focused on time with friends and family, work that’s fulfilling and a sense of financial security.

I’m not suggesting everybody’s on board with this cultural shift. There are still plenty of folks who seek salvation at the shopping mall or one rung further up the corporate ladder. We’re hardwired to run the hedonic treadmill, confident that the next purchase, promotion or pay raise will finally bring lasting happiness, only to discover it doesn’t.

But it’s also possible to buck those hardwired instincts, cultivate new habits and learn new ways of thinking. Change isn’t easy, but it is indeed possible.

Think about the investment world. Most of us are inclined to be overconfident. One example: 65% of Americans think they’re more intelligent than average. In the past, that sort of overconfidence led many investors to try their hand at beating the market. But over the past decade, millions have realized that this overconfidence has cost them dearly, prompting them to shovel trillions of dollars into market-matching index funds.

Similarly, it’s possible to unlearn the beliefs that have left us going nowhere fast on the hedonic treadmill. As I’ve written elsewhere, I see this among my peers, those also in their 50s and 60s. After decades of disappointment, they’ve grown wiser about how to deploy their money for maximum happiness.

Ready to ditch The Good Life and pursue A Good Life instead? Here are half-a-dozen simple strategies, all drawn from my new book:

Create a wish list of potential expenditures, stick it on the refrigerator and revise it constantly. That’ll prompt you to think harder about how you spend your money—and you’re more likely to use your dollars in ways that bring greater happiness.
Think about which moments you enjoy the most during a typical week and which you dislike the most. See if you can pay others to do the tasks you loathe and use the freed-up time to focus on activities you truly enjoy.
Figure out what causes you financial anxiety and then revamp your finances to ease those worries. Often, you can achieve substantial peace of mind simply by keeping a few thousand in the bank, ridding yourself of nonmortgage debt and saving regularly for the future.
Make plans with friends and family—and, if you can, make them far ahead of time. Research says spending time with friends and family gives a huge boost to happiness. And if you hatch those plans far in advance, whether it’s making a restaurant reservation, buying concert tickets or booking a vacation, you’ll enjoy a long period of eager anticipation, which may prove more enjoyable than the event itself.
Imagine the size of your paycheck didn’t matter. What sort of work would you do? You could indeed do that sort of work as a second career—if you prep your finances by saving diligently in the years ahead.
On this earth, our only immortality is the memory of others. Think about how you would like to be remembered by friends and family. What would it take to create those memories—and are you taking the necessary steps?

Aw Shucks

“If you’re interested in improving your financial health or helping someone else repair theirs, run—don’t walk—to get this book.”—Tony Isola, A Teachable Moment

“It’s the first personal finance book I’ve read in quite a while that had me frequently taking notes for my own benefit.”—Mike Piper, ObliviousInvestor.com

“Jonathan Clements says you can build a happier, more prosperous financial life just by spending five or 10 minutes a day for 77 days. Dubious? I confess I was until I read his new book. Now, I’m a convert.”—Richard Eisenberg, NextAvenue.org

Latest Blogs

Influenced by academic research, many investors lean toward small and value stocks. Adam Grossman asks, is it time to add a quality tilt?
“Why do earnings drive share prices?” asks a perplexed Richard Quinn. “Because they create more value. Value for who? Shareholders. But how? Because they increase share prices. How much does this merry-go-round ride cost?”
Looking to improve your finances? Phil Dawson read Jordan Peterson’s bestselling book—not once, but twice—and came away with a dozen financial lessons.
“If you’re looking for a large reward for relatively little effort, I would argue that few endeavors can rival learning about finance,” writes John Lim.
The official savings rate has been revamped—and it now looks like we’ve had a return to financial rectitude since the Great Recession. But is this happy story believable?
“I longed to fall asleep to the sound of chirping crickets, rather than the noise of footsteps pacing back and forth above me,” writes Kristine Hayes. “And so, a few months ago, I began to contemplate becoming a homeowner again.”
Eyeing a target-date fund? “Choosing an investment based on your age is like choosing clothing based on your age,” writes Adam Grossman. “It might be okay when you’re a toddler, but it makes little sense as you get older.”
What would it take to put Social Security on a solid financial footing? Richard Quinn runs the numbers.
Owning a home is now more taxing: The new law severely crimps deductions for mortgage interest, state and local taxes, and casualty losses, explains Julian Block.
“I’m not sure hiring a financial advisor is a sign of getting old, but that’s the way it struck me,” writes Dennis Friedman. “I believe there could be a time when I can no longer manage my investment portfolio.”
The problem isn’t finding great hedge funds and venture capital funds, says Adam Grossman. Rather, the problem is that—as an individual—you simply can’t get in.
“I got a text from my loan officer,” recalls Kristine Hayes. “I nearly choked when I read the message. She told me I’d qualified for a $403,000 loan, with as little as a 5% down payment.”
Creating a written budget, and then tracking your spending against it, is considered a sign of high financial rectitude. Here’s why you shouldn’t bother.
“Many people see health insurance as the problem,” writes Richard Quinn. “It isn’t. Our problem is how we use health care. That’s what drives premiums and that’s what we must deal with.”
How did Dennis Quillen recover from his gray divorce? He dumped his actively managed funds, cut his trading costs—and saved half his income.
“We’re on dangerous ground and yet the [stock] market goes blithely on,” says Vanguard founder Jack Bogle. “You better save more money. You better get more costs out of the equation. It’s probably wise to sell to the sleeping point.”
What caught readers’ attention in September? Check out the seven most popular blogs published by HumbleDollar last month.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble. Jonathan’s most recent articles include Jack of Hearts, Budget Busting and All Better.

The post A Good Life appeared first on HumbleDollar.

Jack of Hearts

ON WEDNESDAY, Vanguard Group’s 89-year-old founder John C. Bogle was in hospital to receive treatment for his latest health scare—an irregular rhythm in his transplanted heart. On Thursday and again today, he was at the Bogleheads’ 17th conference in Philadelphia, as feisty as ever.

The Bogleheads are, of course, the online community who congregate at Bogleheads.org. They’re renowned as fans of frugality—especially frugally priced index funds. And Jack Bogle—even though it’s been more than two decades since he was Vanguard’s Chief Executive Officer—remains their guiding light. He has a new book, Stay the Course, which should be out next month.

Near the beginning of his remarks on Thursday, he quoted the Ancient Greek playwright Sophocles: “One must wait until the evening to see how splendid the day has been.” He then added, “I think my evening is here, and I don’t much like that.”

Jack’s long day has included launching the first index mutual fund in 1976. He was talking about evidence-based investing decades before it was a thing—and even now he’s quick to back his remarks with a timely statistic. Here are just some of his comments from this week’s conference:

1. He points out that today traditional index mutual funds and exchange-traded index funds together account for 37.8% of stock and bond fund assets, up from 9.1% in 2000 and 21.2% in 2010. ETFs now hold slightly more assets than traditional index mutual funds.

Jack’s not entirely happy about that—he notes that investors are too quick to buy and sell ETFs—but admits to mellowing somewhat. “I don’t want to be too tough on ETFs, because there are good uses for them,” he allows.

2. Why buy index funds? Again, Jack goes to the numbers. If you look across the nine U.S. stock market style boxes—large-cap growth, small-cap value, mid-cap blended style funds and so on—just 7% of actively managed funds have outperformed their benchmark index over the past 15 years, according to data from S&P Global.

Advocates of active management often contend that stock pickers are more likely to shine in less efficient markets, such as those for smaller-company stocks. But Jack notes that, over the past 15 years, actively managed large-cap funds have trailed their benchmark index by an average 1.54 percentage points, mid-cap funds by 2.01 and small-cap funds by 2.24. He attributes small-cap funds’ larger shortfall to their higher trading costs and higher annual expenses.

3. Many investors—including me—tilt their portfolios toward value stocks. But Jack points out that, while value has indeed outpaced growth stocks over the past 90 years, the performance advantage has disappeared in recent decades.

“If you think something will be better forever, it’s highly unlikely it will be better forever,” he quips. One piece of evidence cited by Jack: Since Vanguard launched its first value and growth index funds in 1992, the average annual returns have been almost identical.

4. Since year-end 2014, Vanguard has captured 80% of the net new cash flowing into funds. It now manages almost a quarter of stock and bond fund assets, more than twice as much as Fidelity Investments, the next largest fund manager.

In response, Fidelity has rolled out four index funds with zero annual expenses. “They’re clearly making an effort to make a big show in the indexing business,” Jack says. “It’s what I would do if I were Fidelity. I think it’s going to draw a lot of business.”

He says that, for Vanguard, there isn’t a good competitive response. It doesn’t overcharge on some funds in order to subsidize others—which is what Fidelity and other fund companies are clearly doing. “We’re in a kind of a box,” he concedes.

Still, he notes that investors with funds in taxable accounts would be crazy to sell their current funds to buy Fidelity’s new zero-cost index funds. The resulting capital-gains tax bill would likely swamp the potential cost savings.

5. Over the next 10 years, Jack sees nominal corporate profits growing at an average 4% a year, while investors also collect 2% in dividends, giving them a potential total return of 6% a year. But he says, “It would probably take a 25% drop [for the stock market] to get to its normalized value.”

He sees investors surrendering two percentages points a year to falling price-earnings ratios over the next decade, leaving them with a nominal annual return of 4%—which shrinks to just 2%, once you factor in inflation. Meanwhile, over the next 10 years, he expects bond investors to earn a nominal 3½% a year, or 1½% after inflation.

“Everything that’s happening today is great for the short term and terrible for the long term,” Jack cautions. “We’re on dangerous ground and yet the [stock] market goes blithely on.”

Faced with low expected returns, what’s his advice? “You better save more money,” Jack counsels. “You better get more costs out of the equation.”

What about lightening up on stocks? “It all depends on your financial ability and emotional ability to withstand a market decline,” he says. “It’s probably wise to sell to the sleeping point.”

Jack suggests “you might do a five or 10 percentage point reduction” in your stock exposure. But he adds: “There’s no certainty in this, so you never want to do anything too big.”

What did Jack Bogle say at last year’s Bogleheads’ conference? Check out our summary of 2017’s meeting.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness , can now be ordered from  Amazon  and Barnes & Noble . Jonathan’s most recent articles include Budget Busting ,  All Better , Archie Is Scum and  My Favorite Questions .

The post Jack of Hearts appeared first on HumbleDollar.

Heading Home (Part 2)

WHEN I FINALLY made the decision to apply for a mortgage, time was of the essence. Mortgage rates were rising daily and I wanted to lock in a reasonable rate as quickly as I could.

Luckily, I’m one of those people who pride themselves on being well-organized. The loan officer at my credit union sent me a lengthy list of financial documents I would need to provide before she could begin processing my loan application. Having online access to my financial accounts, and digital copies of my tax returns, made the whole process easy. I was able to upload all my documentation to the credit union website within an hour of the request.

A couple of days later, I got a text from my loan officer. I nearly choked when I read the message. She told me I’d qualified for a $403,000 loan, with as little as a 5% down payment. I’d been going on the assumption I’d qualify for no more than a $200,000 loan and was figuring my overall house-buying budget would be no more than $250,000.

In hindsight, I probably shouldn’t have been surprised. I have no debt, a credit score that’s labeled “excellent” and more than $300,000 in my retirement accounts. With about $80,000 in liquid assets that I could use toward a down payment—and a $403,000 loan—I realized I could purchase a house costing nearly half-a-million dollars. But since I make just $71,000 a year, taking out a loan that large seemed ill-advised. Between the mortgage payment, property taxes and insurance, well over 50% of my take-home income would be going toward housing.

In looking at my loan options, and what my monthly payment would be, I ultimately decided to look at homes in the $380,000 range. At that price, I could afford a 20% down payment—thereby eliminating the need for private mortgage insurance—and still be able to find a house in a neighborhood that would allow me a reasonable commute. My monthly payment would be higher than what I was paying in rent, meaning I could put far less money into my retirement accounts than I had been. But it was a tradeoff I was willing to make to have a place of my own to call home.

Kristine Hayes is a departmental manager at a small, liberal arts college. This is the second in a series of articles about her recent home purchase. Her previous blogs include Heading Home (Part 1),  Happy Ending ,   Material Girl.

The post Heading Home (Part 2) appeared first on HumbleDollar.

Under Construction

TO MY WAY of thinking, it is inexcusable that we’ve reached the point where there’s even the possibility that Social Security may not be able to pay full benefits 16 years from now. Americans are scared by the prospect. Some have even given up hope that the program will continue to exist.

Back in 2000, Social Security’s Trustees urged action: “In view of the size of the financial shortfall in the [Old-Age, Survivors and Disability Insurance] program over the next 75 years, we again urge that the long-range deficits of both the [Old-Age and Survivors Insurance] and [Disability Insurance] Trust Funds be addressed in a timely way. It is important to address both the OASI and DI problems well before any necessary changes take effect, to allow time for phasing in such changes and for workers to adjust their retirement plans to take account of those changes.”

Similar warnings, urging action sooner rather than later, are contained in every Trustees report since 2000. And yet nothing significant has been done to solve the problem. To apply another band-aid, Congress in 2017 authorized the temporary reallocation of the payroll tax from the old-age fund to the disability fund for years 2016 through 2018. That was because the disability fund was running out of money sooner than the old-age trust.

It isn’t hard to craft a balanced combination of changes that will fix the problem. I cooked up my own solution using the calculator on the Committee for a Responsible Federal Budget website. These changes would make Social Security solvent for the next 75 years. You may have better ideas. But the point is, a combination of changes will easily fix Social Security and increase benefits. My proposed fix:

Increase initial benefits by 5%.
Raise the normal retirement age by one year to 68.
Change the index for cost-of-living adjustments to CPI-E, which more closely reflects retiree costs.
Increase the payroll tax by 2.5 percentage points, with half coming from each worker and half from their employers. It could be less for workers, but only if the payroll tax increase was greater on employers.
Apply the payroll tax to 90% of wages, while also increasing benefits for those who end up paying more in payroll tax. This still generates additional net revenue, because today’s Social Security benefit formula favors lower paid workers (or, to put it another way, higher earners effectively receive a lower return on the payroll tax they pay).
Cover newly hired non-federal government employees who currently do not contribute to Social Security. This should allow states to adjust their public pensions and lower long-term liabilities.
Apply the Social Security payroll tax to the cafeteria plans offered by many employers. When employees pay for health benefits offered through their employer, they pay with dollars that are not only income-tax-free, but also escape the payroll tax.
Diversify a portion of the Social Security Trust funds away from Treasury bonds and into other investments, including stocks, with a view to earning higher returns. Given the long-term nature of Social Security’s financial obligations, such a move would involve minimal risk.

With the above plan, no current retirees are harmed, while the impact on current workers is modest. Nobody likes higher taxes of any kind. But let’s face it: Social Security is part of our social and economic fabric. Americans will continue to rely on Social Security for a significant portion of their retirement income—and we need to agree on a fix.

Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. His previous blogs include Get Me the Doctor, Running in Place and Tortoises Needed. Follow Dick on Twitter @QuinnsComments.

The post Under Construction appeared first on HumbleDollar.

Bouncing Back

IN SUMMER 2005, my 40-year marriage officially ended. My previous world, with its hopes and dreams, was no more. My life as a single individual became the new reality. Part of the new reality was financial in nature. Previously developed long-term plans became fiction. New plans, by necessity, appeared on the drawing board.

My personal net worth had dropped by roughly 50%. I no longer owned my historic neighborhood condo. I lost two of our three cars, and I lost all or portions of our mutual funds and cash investments. But there were two bright spots: I kept my retirement income annuity and I still had my Social Security benefits.

The costs of the unwanted divorce impacted my financial well-being in other ways. I was facing, for the first time in four decades, many of the costs of simply being single again, notably paying taxes at a single rate rather than a joint rate. I also needed to replace items retained by my ex-spouse, including appliances and furniture.

In addition, I lost the built-in efficiencies that couples enjoy with such things as grocery shopping and restaurant two-for-one deals. Other inefficiencies included hotel rooms—they cost the same for one person as two—and cruise lines, which charge a penalty for single occupancy.

But I slowly began to see opportunities for greater financial security. My net worth was at a modern low. I recognized that my two main income sources—my state retirement benefits and Social Security—were both indexed to the cost-of-living. I was also noticing modest increases in my dividends and capital gains from the investments I retained.

The biggest bright spot: My new expenses were substantially lower than my income. What did I do with the money?

I increased my savings. In my initial single years, I saved about 50% of my annual income. Today, it’s still at around 30% to 40%.
I moved my Vanguard Group mutual funds into so-called Admiral shares to lower my fund expenses. I moved my brokerage account to benefit from lower trading fees.
I moved my mutual fund money into index funds and out of actively managed funds.
I limited my number of individual stock holdings. I’m currently at four companies and have never owned more than five. I plan to keep three of the stocks indefinitely; the fourth is on “life support.”
I changed my mind twice about my bond allocation. I lowered my percentage in bond holdings at first, which helped my results. More recently, I have increased my bond holdings, though the percentage allocation is still quite low.

I’ve been pleased with the rebirth of my retirement plan over past 13 years. I successfully weathered the Great Recession stock market drop and have benefited from the long-running bull market that followed. Only in one year did my investment net worth show a loss—a drop of 12.1%. My portfolio’s compound annual growth rate for the entire period, reflecting both investment gains and new savings, has been 18.6%. It’s a nice figure, but it’s unrealistic to expect a continuation at this level. Still, if I should live as long as my late Mom, who died at age 99, I may yet see the day when I become that multimillionaire next door.

Dennis E. Quillen is a retired economic geographer and university professor. In addition to blackjack, he loves long-term investing. His previous blogs were Starting Over and Getting Comped.

The post Bouncing Back appeared first on HumbleDollar.

September’s Hits

WHICH ARTICLES were readers drawn to last month? Here are the seven most popular blogs published by HumbleDollar in September:

Buy What You Know
Archie Is Scum
Striking a Chord
Lay Down the Law
That’s Rich
Twelve Rules
Any Alternative?

Last month also saw lots of traffic for HumbleDollar’s mid-September newsletter and for a blog from late August, Bad News.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble.

The post September’s Hits appeared first on HumbleDollar.

Not for You

MY GRANDFATHER was from Queens in New York City. He was a great guy and taught me a lot. He was also a native New Yorker, so he was street smart and tough.

One day, while we were walking together down 47th Street, near Times Square, I stopped to look at the jam-packed window of an electronics store. My grandfather waited patiently, but cautioned me, “Careful, they’ll take the eyes out of your head.”

It was a funny expression, but I understood: Be careful of shiny objects, he was saying, and be even more careful of the salesmen peddling them.

That was more than 30 years ago, but I was reminded of it when I heard a financial industry insider offer similar words to the wise. In this case, the shiny objects in question were private investment funds, like venture capital funds and hedge funds.

Andy Rachleff is one of Silicon Valley’s most successful venture capitalists. In 1995, he founded the firm Benchmark Capital. Over the course of his career, Rachleff achieved an enviable record, including making a fortune as an early investor in eBay.

Needless to say, if you had been an investor in Benchmark’s funds, you would be very happy today. Indeed, it might seem logical to try to find the next Andy Rachleff. After all, who wouldn’t want to get in on the ground floor of the next generation of successful startups?

This is where Rachleff’s warning comes in. In an interview, he explained why, as an individual investor, you shouldn’t try to find the next Benchmark. “The only venture capital funds that will let [the big wealth management firms catering to individual investors] invest in their funds are the ones that are desperate for capital. They suck…. So by definition, if [a wealth management firm offers to] give you access, run away.”

Strong words, but an important message: The problem isn’t that you can’t find great investment funds. The problem, in Rachleff’s view, is that—as an individual—you simply can’t get in. Instead of settling for second-best, it’s better to take a different approach entirely. Here are two recommendations:

First, remember that asset allocation is what matters most. What we’re talking about here is your basic mix of the four major asset classes: stocks, bonds, cash investments and alternative investments. Research has shown that it’s much more valuable to spend time thinking through the types of investments you own, rather than endlessly deliberating over the choice of specific investments.

Second, recognize that the most powerful—and easiest—way to diversify is with stocks and bonds. Historically, stocks and bonds have exhibited a negative correlation with each other. In other words, when one goes up, the other goes down, and vice versa. That’s why I don’t think you need to get too clever and choose other investments. You might see advertisements for gold funds, currencies, commodities and the like. But the data indicate that these don’t provide the same diversification benefit as a simple stock-bond mix. Yes, they sound sophisticated, but they aren’t much help.

Culturally, 47th Street seems a long way from Wall Street. Scratch the surface, though, and I don’t think they’re that different at all. Wall Street’s salespeople look professional, with their pinstriped suits and fancy offices. But don’t let that fool you. Regardless of the venue, always be wary of shiny objects.

Adam M. Grossman’s previous blogs include Off Target, Just Like Warren and Any Alternative . 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 Not for You appeared first on HumbleDollar.

Budget Busting

WHO SHOULD DIET? This isn’t exactly a tough one: It’s people who need to lose weight.

Who should budget? If you listen to conventional wisdom, this is another easy one: It seems we all should. Creating a written budget, and then tracking our spending against it, is considered a sign of high financial rectitude.

I think this is nonsense. I have never created a written budget and I don’t track my spending—because I don’t need to. I suspect many readers of this blog are in the same camp.

Let’s say you’re in the workforce and save at least 12% of your income. Or assume you’re retired and each year you withdraw no more than 4% or 5% of your portfolio’s beginning-of-year value. In either case, you clearly have your spending under control, so why does it matter exactly how you spend your dollars?

I’m not the only one who feels this way. You would be hard-pressed to find a group of people who are thriftier than the Bogleheads, devotees of Vanguard Group founder John C. Bogle. A recent discussion on the Bogleheads’ forum focused on the need to budget. Among those who commented, an overwhelming majority said they don’t bother.

In other words, budgeting really is the same as dieting. The only people who should budget are the people who need to budget—those who save too little and spend too much. And my hunch is, like so many dieters who fail to lose weight, those who budget often make scant financial progress.

Why not? A written budget is no competition for our human failings. We all have weaknesses. It might be smoking, drinking, gambling, failure to exercise, infidelity or overeating.

But for many, their big weakness is spending too much. A minority of folks—like those found on the Bogleheads’ forum—are supremely disciplined about money. But most people aren’t: Controlling their spending is a daily battle and, more often than not, it’s a battle they lose. A written budget could potentially help the spendthrift. But I suspect it serves mostly to deepen their sense of failure.

How can we win this fight? My advice: Forget budgeting—and do what many of the Bogleheads do, which is to “pay yourself first.” That might sound trite. But it works—and the best way to put it into action is to automate your savings program. That might mean making payroll contributions to your employer’s 401(k) or 403(b) plan, or it could mean signing up for mutual-fund automatic investment plans.

Both strategies helped me get started as a saver. Indeed, when I was a young, penniless reporter at Forbes magazine, with a newborn at home and a wife in graduate school, I didn’t initially sign up for the 401(k). To my surprise, I got a call from the company’s treasurer, telling me I ought to contribute and saying I’d never miss the money. He was right.

These automatic savings programs are effective, because they get money out of our paychecks and bank accounts before we have a chance to spend it. We’re then forced to live on whatever remains. Yes, there’s always a risk we’ll keep spending recklessly and rack up the credit cards instead. But if we can resist that urge and stick with our automatic savings program for maybe a dozen years, we’ll likely be astonished by the results.

While I don’t think there’s much virtue in budgeting, I do believe there’s great value in knowing one number: How much we spend each month on mortgage or rent, utilities, groceries, car payments and other fixed living costs. That’s crucial information if we find ourselves out of work and it should guide the size of our emergency fund. What if our fixed living costs are consuming a large portion of our income? That may be the reason we find it so hard to save.

Follow Jonathan on Twitter  @ClementsMoney  and on Facebook . His new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble. Jonathan’s most recent articles include All Better, Archie Is Scum and My Favorite Questions.

The post Budget Busting appeared first on HumbleDollar.

A Word of Advice

THERE ARE CERTAIN things in life that remind you you’re getting old: You receive mail from companies offering their cremation services. You realize your house was made for a younger person. You have this urge to throw and give away things as if you won’t be here tomorrow. You feel it’s time to hire a financial advisor.

Actually, I’m not sure hiring a financial advisor is a sign of getting old, but that’s the way it struck me. I turned 67 this year, which I don’t consider old. But I believe there could be a time when I can no longer manage my investment portfolio. If I had a pension that covered my living expenses, I might have felt differently. But I rely on my savings for the majority of my retirement income—and I believe hiring a financial advisor is the right decision for me.

Today’s high stock-market valuations and low interest rates make it challenging to figure out the right way to draw down a retirement portfolio. That was another factor in my decision to hire a financial advisor—and it wasn’t the only one.

Having someone I can trust to give me reassurance and emotional support is important to me. I’m an investor whose emotions can sometimes derail a perfectly good investment plan. A good advisor could bring stability to my portfolio—and that should translate into better returns.

In addition, if something should happen to me, there will be someone to help my significant other navigate my finances. And finally, it’s become something I just don’t want to deal with. I used to like managing my money. Not anymore.

After much thought, I decided to go with Vanguard Group’s Personal Advisor Services. Here are seven reasons I chose Vanguard:

I trust the folks there. I have had a relationship with Vanguard for many years. I feel comfortable with the firm.
Its service is inexpensive. Vanguard charges 0.3% of assets each year to manage my investment portfolio. The funds in my portfolio average approximately 0.08%, so the total cost is about 0.38%. By contrast, the industry average for a financial advisor is almost 1%, while some major fund companies charge close to 0.5% for just a short-term domestic bond fund.
According to Barron’s, Vanguard was ranked No. 1 among the robo-advisors that the publication reviewed. Some of the metrics Barron’s used to evaluate this type of service were: customer experience, cost, performance, access to advisors, financial planning and account minimum.
I feel the improved performance of my portfolio will more than make up for the 0.3% management fee.
I like the stock, bond and cash allocation that Vanguard selected for me. It meets my financial requirements and risk tolerance.
I like the way Vanguard manages its advisory service. A financial advisor cannot recommend an investment plan without getting it approved. It’s reassuring to know my plan meets Vanguard’s requirements.
Vanguard’s service fulfills all my financial needs. I wanted someone to allocate my funds, rebalance my portfolio, tell me how much I can spend each year and update me on my progress in meeting my target goals. Vanguard does just that.

We have seen commission-free exchange traded funds and no-fee index mutual funds. Will Vanguard’s type of advisory service be the next revolution in bringing affordable financial advice to the masses? If so, how low can these fees drop?

This is not a recommendation for Vanguard’s Personal Advisor Services. Everyone has different needs and requirements. But I’m at a point in my life where I don’t want to be thinking about my investment portfolio. I’d rather be thinking about my next vacation. I believe hiring a financial advisor and selecting Vanguard will help me achieve that goal.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include Friendly Reminder, First Responders and Truth Be Told.

The post A Word of Advice appeared first on HumbleDollar.