Jonathan Clements's Blog, page 419

Bad Old Days

“STOP PULLING MY LEG, Grandpa. You’re kidding, right? Is it really true that people:

used to believe they could beat the market?
paid 2% of assets and 20% of profits to hedge fund managers?
got their stock picks from a guy screaming on the television?
thought cash-value life insurance was a good investment?
believed that brokers would act in their best interest?
studied stock price charts to figure out what would happen next?
bought and sold exchange-traded index funds like crazy?
were given 30 investment choices in their 401(k) and left to figure it out on their own?
treated top money managers like they were rock stars?
retired and all they had to live on was Social Security?
didn’t object when companies spent billions buying back shares to disguise the dilution caused by employee stock options?
bothered to listen to the forecasts of market strategists?
paid 1% a year to financial advisors and all they got in return was a portfolio of mutual funds?
imagined they could make money with a variable annuity charging 3% a year?”

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Growing Up (Part II)

I DON’T THINK MY PARENTS ever had any sort of five-step plan to teach me about money. I was always parsimonious, so they weren’t very focused on how I spent. They did, however, teach me two powerful life lessons—which changed not just the way I thought about money, but who I am.

Everything has a cost. I attended private school from fourth to ninth grade, coasting by with B plusses and A minuses. My report cards usually included comments like “Zach could do so much better if he tried harder” or “When Zach is attentive, he is great, but at other times….”

I told my parents this is what teachers said about everybody. They told me that if the comments didn’t change, they would pull me from the school, because they weren’t paying tuition for me to be comfortable. I didn’t believe them. It turned out it wasn’t an empty threat. Despite my rage, they transferred me to public school for tenth grade.

Skin in the game. I was furious with my parents, but I also realized how serious they were. I refocused on academics and earned better grades, without any negative teacher comments. They let me reapply to my old private school, where my closest friends were and where I could actually make the basketball team, and I was accepted.

But my parents laid down a condition: I had to pay 10% of the tuition out of my own pocket. They are both doctors and didn’t need my money. But they had seen my previous lack of appreciation—and wanted to ensure I didn’t again take private school for granted.

For an entire year, I worked a retail job in the maternity and kids section of a department store in the Maine Mall in South Portland, paying back every penny to my parents. The experience made me a completely different student during my junior and senior years and, when I reached college, I valued my education—and how much it was costing—far more than some of my less grounded peers.

This is the second in a series. The first part appeared July 25.

Zach Blattner’s previous blogs include Seller’s Remorse and   Too Trusting . Zach lives in Cambridge, MA, and is a former teacher and school leader who now teaches English teachers as a faculty member at Relay GSE. He is a self-taught finance nerd who dispenses advice to his wife, friends, family and anyone else willing to listen.

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July’s Updates

EVERY MONTH, I revise a slew of pages in HumbleDollar’s online money guide. Here are some recent updates:

Home prices continue to rebound, though they remain just 3.2% above their mid-2006 peak—and houses still look affordable by historical standards.
U.S. stocks are yielding 1.9%, less than shares in almost any other developed country.
I updated the page devoted to retirement calculators, dropping some that now require site registration and adding others that don’t. My preference in online calculators: They should be simple but smart—and you shouldn’t have to create a username and password.
States continue to tweak their estate taxes, with many raising their exemptions so they’re more in line with the federal government’s $5.49 million.
The federal government boosted the student loan interest rate for the 2017-18 academic year, with Stafford loans now charging 4.45%.
I revised the page devoted to one-fund portfolio solutions, including adding Charles Schwab’s relatively new target-date index funds, which charge a slim 0.08% a year and have no investment minimum.
If you haven’t already, check out the money guide’s five new know thyself sections, which touch on overconfidence, loss aversion and our perennial dissatisfaction.

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Growing Up (Part I)

I RECENTLY RECEIVED an email from a friend asking, “What financial advice would you give to your younger self, now that you’re older?” I had to think for a while. But once I sat down to reply, I realized my attitudes about personal finance were already well-developed by the time I was in my 20s. I also realized my financial beliefs had been shaped, in part, by growing up in a family where money wasn’t exactly plentiful.

As a child, I don’t remember ever having a formal discussion about personal finance with my parents. The lessons I learned about spending and saving came from real life. My family lived in rural Oregon. The modest allowance my parents provided each week was earned doing chores around our small farm. Returning bottles to the grocery store, to redeem the nickel deposit, served as supplemental income. The back-to-school supplies I purchased in the fall were financed with the proceeds from selling an animal each summer at our local 4-H livestock auction.

We rarely ate out, but if we did, it was almost always at McDonald’s. We didn’t have cable television and we didn’t take expensive vacations to exotic locations. Instead, we went on camping trips. I spent a good portion of my summer vacations exhibiting our animals at county fairs throughout the state. The budgeting skills I have as an adult can easily be traced back to my youth, when I earned multiple awards for my 4-H record books, filled with the profit-and-loss statements for each of my projects.

When I decided to go to college, my parents were supportive of my decision, but they were unable to help me financially. Instead, I applied for, and received, several needs-based grants. I also won thousands of dollars in merit-based scholarship money. I worked part-time while taking classes and lived such a frugal lifestyle that, when I graduated with my bachelor’s degree, I was not only debt-free, but also I’d managed to amass $5,000 in a savings account to help pay for graduate school.

The financial lessons I learned growing up are still with me as an adult. I grew up not only appreciating the value of a dollar, but also learning that the memories from life experiences are far more valuable than any item that can be bought. To this day, I carefully pick and choose what I’ll spend my hard-earned money on. A day with friends at a pistol shooting competition is more highly valued than any possession I might purchase.

This is the first in a series.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. Her previous blogs include To Buy or Not to Buy and Quitting Early .

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On Second Thought

IF WE’RE ABOUT TO BE HIT by a car, our instinct is to jump out of the way. As it happens, that’s also the smart thing to do. This would not be the best moment to stop and ponder whether we’re overreacting. But while our instinctive reactions are often correct, especially when faced with physical danger, they can lead us badly astray when managing money. Want to learn more? Check out my latest client letter for Creative Planning, where I sit on the advisory board and investment committee.

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This Week/July 23-29

SEE IF ESTATE TAXES ARE AN ISSUE. With 2017’s federal exemption at $5.49 million, few Americans need worry about federal estate taxes. State estate taxes are an issue in just a third of states, though state exemptions are often below the federal level. For most Americans, the biggest “death tax” will be the income taxes owed on inherited retirement accounts.

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Looking Bad

AS I THINK BACK over the past three decades, I have one overriding investment regret.

No, it has nothing to do with the investments I bought. For much of the past 30 years, I’ve owned a globally diversified portfolio, with 100% in stocks when I was younger and closer to 70% now that I’m in my mid-50s. Initially, I owned actively managed funds and a few individual stocks, but I substituted index funds as they became available, so my stock performance has been what you would expect—very similar to the broad market.

To be sure, I could have done better if, say, I hadn’t allocated so much to foreign stocks. But that’s the nature of a diversified portfolio. There will always be laggards, but we only know their identity with hindsight.

If my big regret isn’t the investments I bought, what is it? More than anything, I wish I hadn’t spent so much time watching the markets. Admittedly, this was partly professional necessity. I was occasionally called upon to write about the markets, so I needed to know what was going on. Still, I could have spent a lot less time looking at the daily ups and downs, and yet I didn’t. Why not? I suspect there are three reasons.

First, like a whiny child that throws the occasional tantrum, the stock market demands our attention. All the turmoil is hard to ignore—and it’s becoming harder. Today, with a quick glance at our phones or our computers, we can find out what’s happening to stocks and where things stand with our portfolio. This is not helpful: We receive far too much short-term feedback on our long-term investments, and with that comes the risk that we will act hastily.

Second, watching the markets can be entertaining, but much of the time it’s mindless entertainment. Indeed, I follow the ups and downs with the same curiosity that I follow the results of the Baltimore Orioles, Brooklyn Nets, Plymouth Argyle and Washington Redskins. It’s been years since I’ve visited a stadium to see any of these teams play or even watched an entire game on TV, and yet I feel a tad happier when they win and a little sadder when they don’t.

(For those who don’t immediately recognize the name Plymouth Argyle, it’s a minor English soccer team to which I pledged undying allegiance when I was 10 years old—and which recently brought modest joy to my 54-year-old heart by gaining promotion from League Two to League One.)

Third, and perhaps most important, watching offers the illusion of control. If the stock market plunges, I feel it’s important that I know right away—even though my awareness won’t stem the market’s losses and, indeed, I won’t do much with the information. These days, I mostly content myself with rebalancing and occasionally buying a new index fund. If the market rose or fell 10% from here, I’d rebalance yet again, but that would probably be it.

I don’t just follow market and sports results. Every day, I spend hours checking email, Twitter, Facebook, LinkedIn, my website’s traffic, my book sales, engagement with my monthly newsletter, and more.

I love the ease of communication offered by email, the interesting articles I discover through Twitter, and the news about friends and family on Facebook. Instead, what bothers me is the endless stream of numbers that grabs my attention today, but which is forgotten tomorrow, when there’s another round of meaningless numbers to ponder. It’s information without insight, and yet it gobbles up time—a loss I feel more acutely as I age. The upshot: I’m trying to train myself to look less, but it’s a struggle.

Did you know the English soccer season starts in a few weeks?

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Less Green

I WAS STAYING ON THE OUTSKIRTS of Mexico City, with no internet access. But I had my satellite radio and I was listening to CNBC. The reception wasn’t good, but the news was even worse. While bad financial news had been pouring in from every corner of the globe for months, it seemed matters had suddenly got much worse. It was September 2008.

The global financial crisis affected many companies, big and small, and the commercial landscaping company that my twin brother and I owned was no exception. That fall, as we approached contract renewal season, there were challenges awaiting us like none we had experienced since starting the company in 1992.

Properties still needed to be mowed and leaves removed, but that wasn’t where the profit was. Mulching provided a good stream of revenue to help cover costs, but it wasn’t a moneymaker. Instead, the money was in add-on services, such as seasonal flower installation, landscape installation and lawn care applications. These services could be cut out of contracts with a stroke of a pen, and they were. Our commercial customers, facing the same grim reality that we were, reduced these services to such an extent that we lost 25% of our business in one year.

In addition, customers—including our largest—were renewing late and asking that they make monthly payments starting in the spring, rather than at the beginning of 2009. This hurt, because we depended on those payments during the winter months to cover payroll and overhead expenses, and to purchase materials and equipment ahead of the spring season. And monthly payments, which would normally be paid within 30 days, were not getting paid on a timely basis.  Approaching the winter of 2008—2009, we knew we needed to take action to protect our company.

Going into the Great Recession, our company was in sound financial condition. We carried very little debt and there was a decent amount of cash in the bank. We operated the company efficiently. There was little waste. Production man hours were closely monitored and employee overtime kept to a minimum. Running a lean operation was my obsession. This was a good thing, but it left little room for savings. To keep the company in good financial shape, we needed to make changes that would hit each of our employees where it hurt the most—in their paychecks.

Initially, the plan was to lay off some of our winter employees. But after meeting with them, it was decided that each employee would take one week off without pay, so that the pain was spread out evenly among them. My brother and I withheld our salaries for two months. No contributions were made to our retirement plans. Prices and terms were renegotiated with our vendors. We went to a four-day workweek, working ten hours each day. This would reduce our travel expenses and keep our employees in the field longer each day. To reduce payroll processing expenses, we went to a biweekly pay schedule.

Our expectations in late 2008—that the upcoming year would be a challenge—did indeed become reality. With the cash we had on hand, we were able to get through the spring months, covering payroll and the hefty expenses of mulch and equipment. Without the cash, I believe the financial condition of our company would have deteriorated rapidly. We stayed on top of customers, urging timely payments. Production was tracked more keenly than ever before.

Over the years that followed, our company was able to increase annual revenue. But when we sold the company at year-end 2012, we still hadn’t reached the levels of pre-2008. Those existing customers who cut back on additional services eventually started to invest in landscaping again. We continued to work a four-day work week, a change that was initially difficult for our employees to grasp, but they soon embraced it. Contract negotiations remained a challenge with many customers still demanding that we keep prices at levels that left little room for profit. My brother and I continued to collect salaries that were 40% below where they were prior to 2009.

And so, years later, the impact of the Great Recession was still evident. Nonetheless, when it came time to sell our company, we could show the buyer that we had a company that—despite the turbulence of those years—remained on a strong financial footing and operated more efficiently than ever before. We had survived the Great Recession.

Nicholas Clements is one of Jonathan’s older brothers. He is retired and lives just outside Washington, DC. His previous blogs include Not a Good Time and  Opening My Wallet .

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Housing: 10 Questions to Ask

HOUSING IS THE BIGGEST EXPENSE for most American families, typically devouring a third of their budget. Are those dollars getting spent wisely? Here are 10 questions to ask yourself:

Should you buy? If you play around with the mortgage calculator at Bankrate.com, you can figure out how big a mortgage you could support with your monthly rent payments. That will give you a sense for whether homeownership is within reach. Even if it is, don’t buy unless you can see staying put for at least five years, and preferably seven years or longer.
Should you wait to buy? While purchasing a home early in adult life can be a great idea, because you lock in your housing costs and start to build home equity, there’s a potential downside: You may not currently have the wherewithal to buy the sort of house you really want. That means you could quickly find yourself trading up to a larger, better place and incurring the hefty cost of selling one home and purchasing another—an expense you might have avoided if you’d continued renting for a year or two.
Will you appear creditworthy to mortgage lenders? A few months before you start searching for homes, check your credit reports and credit score to make sure there’s nothing that’ll scare off lenders.
Are you remodeling for the right reasons? Home improvements are typically money losers, so remodeling projects should be motivated by the desire for a nicer home—and not by some wrongheaded notion that the upgrades will be a good investment.
Should you refinance? Even if you can lower your monthly mortgage payment, it may not make sense, depending on how much it’ll cost to refinance—and if the lower payments are driven largely by adding extra years to the length of your loan.
Is your home fit to be sold? With the need to clear out clutter, touch up the paint, spruce up the yard and more, it can take many months to get a home ready for sale. Want to put your house on the market by year-end? You should probably start the prep work now.
Should you make extra-principal payments? By adding a little money to each monthly check, you can pay off your mortgage years earlier—and earn a pretax return equal to your mortgage rate.
Are you on track to pay off your mortgage by retirement? Making that final mortgage payment can sharply reduce your cost of living, making retirement more affordable.
Are there rooms in your house, besides any bedroom set aside for guests, that you rarely or never use? That may be a sign you own more house than you really need—and perhaps you ought to trade down.
Should you tap into your home ‘s equity to pay for retirement? To turn home equity into spending money, you might downsize, remortgage your home or take out a reverse mortgage.

This is the second in a series of blogs devoted to key questions you ought to ask. The first blog focused on retirement.

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Chasing Points

I HAVE BOOKED EIGHT one-way domestic flights this year, as well as multiple hotel nights—and I’ve done it all with the rewards points from my three Chase credit cards.

For those interested in earning rewards, you can’t go wrong with the dependable duo of Chase Sapphire Reserve and Chase Freedom Unlimited. Small business owners might also pick up Chase Ink Business Preferred.

The Chase Sapphire Reserve, the “premium” card of the trio, first made waves in August 2016 when it offered a 100,000-point signup bonus for those who spent $4,000 in the first three months. While that bonus has since dropped to 50,000 points, it’s still a worthwhile card. The annual fee is $450, but there’s a $300 annual travel credit that is automatically applied to your account, effectively reducing the fee to $150.

On top of the signup bonus, Sapphire Reserve offers other benefits. You earn triple points on all travel and dining spending. When redeeming points on Chase’s rewards portal, you also get 50% more value for each point. For example, your 50,000 point bonus would technically be worth $750 when redeemed through Chase’s Ultimate Rewards portal. Sapphire Reserve also offers a $100 credit when you apply for TSA PreCheck or Global Entry.

The Points Guy, a popular website, generally values Chase Ultimate Rewards points at 2.1 cents each. That means 300 points from a $100 travel or dining purchase is valued at $6.30. Not bad. Ignoring the signup bonus, that means you’d have to spend about $2,380 on travel and dining a year, or $198 per month, to cover the $150 annual fee. Everything beyond that is gravy.

The next card you should pick up is Chase Freedom Unlimited. While Sapphire Reserve gets triple points on travel and dining spending, and one point per dollar on all other spending, Freedom Unlimited gives you 1.5 points on every purchase. Result: You’ll want to use Freedom Unlimited for all spending, except travel and dining.

One added benefit of coupling Freedom Unlimited with Sapphire Reserve: You can transfer your Freedom Unlimited points to your Sapphire Reserve card, earning that 50% bonus when redeeming points through the Ultimate Rewards portal. Chase Freedom Unlimited has no annual fee, and also offers a $150 signup bonus after spending $500 in your first three months.

The last card of the trio, Chase Ink Business Preferred, only applies to small business owners. Since freelancers now account for 35% of workers, I think it’s worth mentioning. Ink Business Preferred comes with a whopping 80,000 point bonus when you spend $5,000 in the first three months. The card also offers triple points on a range of business purchases, including travel, shipping purchases, internet, cable, phone services, and advertising spends on social media and search engine sites. The card has a $95 annual fee, but the signup bonus and rewards quickly cover the cost.

What can you do with all these Chase points? You could either use them to book hotel rooms and flights directly through Chase’s rewards portal or transfer them to a long list of partners. Generally, transferring to rewards partners like British Airways, Hyatt or United Airlines is considered the best way to maximize value, according to The Points Guy. But with the 50% bonus when redeeming through the Ultimate Rewards portal, I’d recommend shopping around before deciding how to redeem points.

After picking up these three cards, you can take your rewards strategy in whatever direction makes sense for you. The Points Guy has plenty of lists of top credit cards, depending on whether you prefer cash back, hotel nights or airline tickets. Signup bonuses are the biggest opportunity to pile up points, so consider signing up for one or two new credit cards each year to keep your rewards points topped up.

Steven Aguiar’s previous blogs include Site Seeing (Part I) and  Small Changes, Big Dollars . Steve is the founder of  BlueWing,  a B2B digital marketing agency. He majored in Economics and Hispanic Studies at Brown, and is a big fan of compounding interest.

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