Jonathan Clements's Blog, page 423

DaveRamsey.com

MY FIRST ENCOUNTER WITH DAVE RAMSEY was in 2010, when I stumbled across a radio broadcast featuring one of his recorded presentations. His style was funny and engaging, and I thought he might be helpful in teaching my kids about money.

I bought each of them his book The Total Money Makeover and gave them reading assignments, which were followed by group discussions in the weeks that followed. Later, I also attended his local Financial Peace University (FPU) classes with daughter Karah. In terms of stamping the financial ignorance out of my kids, results have been mixed. Still, I consider myself a fan.

Mention Dave Ramsey and there will be the full spectrum of responses. Those who consider themselves highly literate in personal finance will scoff with indignation, including many who read this blog, I suspect. This is not Ramsey’s audience. There will be others who have applied his “seven baby steps” formula and have rescued themselves from the brink of financial, and sometimes marital, disaster. They will pronounce their everlasting gratitude. I know enough of these people to have respect for the market that Ramsey serves.

His site’s landing page has plenty of links to simple but free tools and motivational anecdotes that might encourage those wanting to get a grip on their finances. It also provides links to help you find Ramsey’s daily radio broadcast and local FPU classes.

To be sure, there are plenty of opportunities to purchase books, DVDs and other items on the website, but Ramsey practices what he preaches with regard to credit cards: You cannot use them to purchase anything directly from the site. Credit cards and debt are anathema to his financial roadmap, and are to be dispatched with swift and brutal efficiency. Ramsey also uses his powerful brand to promote a number of financial products. In addition, there are tools to find “endorsed local providers” for real estate, insurance and tax services. This is a for-profit enterprise, after all.

Ramsey’s teachings include advice and financial projections that are disputed, and may even cause you to scratch your head from time to time. In one very public dustup, Ramsey’s investment and retirement income guidelines were challenged by a group of financial planners. Ramsey did not back down. When providing sample numbers in his FPU presentation, he uses the question, “What if I’m half wrong?” His point: Even if his projections are incorrect, the principles behind them are not.

The site also includes a blog that takes on financial topics of a fairly elementary nature. Again, for his target audience, discussions are probably best kept well out of the weeds. The content on the site may seem rudimentary and incomplete to some of us, but I believe it holds real value for those struggling to come to grips with the world of personal finance.

If I had a friend who needed some basic guidelines on budgeting and money management, I wouldn’t hesitate to send them to the site. Ramsey gives simple advice that is easy to grasp for even the most financially challenged among us. He is likely to leave his followers in far better financial shape than he found them. The anecdotes and encouragement on offer may inspire readers to overcome their fears—and instill the necessary confidence to take those first “baby steps” toward financial freedom.

When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland. His previous blogs include Making Your Case , Course Correction and  A Thanksgiving Prayer . You can contact Phil via LinkedIn .

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This Week/Jan. 14-20

SET UP TWO-FACTOR AUTHENTICATION. If a thief gets online access to your financial accounts, your life’s savings could be at risk. What to do? If your bank, brokerage firm or fund company offers it, set up two-factor authentication. The firm will text you a special access code every time you log on or when you log on from an unrecognized computer.

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Price vs. Value

WE CAN THINK OF INVESTING as an argument between two competing opinions: What we think an investment ought to be worth—and what the market currently says. It’s an argument the market usually wins.

While we can be highly confident what, say, a certificate of deposit or a Treasury note is worth, it’s much harder to put a value on stocks, gold, high-yield junk bonds and other riskier investments (and, I’d argue, all but impossible with bitcoin). Even most money managers, who devote their professional lives to scouring the markets, aren’t skilled enough at spotting undervalued investments to overcome the investment costs they incur and the management fees they charge, and thereby deliver market-beating returns.

That’s why I start by assuming that the current price for stocks, bonds and other securities is probably pretty close to the fundamental value for these investments. I don’t subscribe to the extreme version of the efficient market hypothesis, which says securities are always correctly priced. But I do believe that the market is sufficiently efficient that it’s extraordinarily difficult for investors to earn market-beating returns over the long run, and thus most of us should steer clear of picking individual stocks and buying actively managed funds, and instead purchase market-tracking index funds.

This conflating of price and value, however, has its dangers. If investors assume price equals value, they may become overly enthusiastic about stocks during bull markets—and overly pessimistic during market declines.

Cast your mind back to March 2009, when the S&P 500 was 57% below its October 2007 high. If you had bought a collection of stocks for $1,000, and now honestly believed that their true value was just $430, dumping your holdings wouldn’t be an unreasonable response. After all, given the shocking loss of value in just 18 months, who knows what your shares might be worth if you stuck with them for another few months? But selling in March 2009 would, of course, have been a terrible mistake—which is why we need some sense of stocks’ value that is distinct from their price.

Even bull markets, like the one we’ve enjoyed for the past nine years, can be dangerous. If investors assume that stocks are just as good value today as they were in early 2009, they may allocate more to stocks than they can reasonably stomach, without appreciating the potential downside.

What to do? My advice: Imagine a line climbing steadily at 6% a year, with 2% from dividends and 4% from share price appreciation, as stocks rise along with 4% growth in earnings per share. That’s my expectation for the long-run return from a globally diversified stock portfolio.

Stocks will vary from this 6% line, as investors’ enthusiasm waxes and wanes. When stocks earn less than that 6% in a year, I assume we’ll see catching up at some point in the future and that my tenacity will eventually be rewarded. What happens if stocks race ahead of that 6%, as they did in 2017? I assume we’re likely borrowing gains from the future. Even as I admire my fattened portfolio, I brace myself for lower returns in the years ahead—and do a little rebalancing.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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More for Your Money

AT SEVEN O’CLOCK THIS MORNING, as my wife and I tried in vain to wake our children for school, we heard a similar response as we went from room to room: “My head hurts.” Nobody wanted to get up.

I have to say, I don’t blame them. It’s the middle of winter here in Boston. The sky is gray and the thermometer seems stuck below zero. It can be hard for anyone to feel motivated, let alone kids facing another day in school.

But for parents, there is one thing that can make this time of year a little less unpleasant: year-end bonuses. If you are the fortunate recipient of a bonus—or if you just received a pay raise or the new tax rules have put more in your paycheck—here are 10 ideas for allocating those funds in ways that might lift both your spirits and your finances:

1. Give yourself a gift. Everyone knows the old expression that “money doesn’t buy happiness.” I generally agree with that. But recent research has shown that certain types of spending do indeed boost happiness. Among them: Buy experiences, not things. In fact, there’s an entire book devoted to the topic: Happy Money by Elizabeth Dunn and Michael Norton.

2. Give to others. It is important to give, but unfortunately the new tax rules will limit many taxpayers’ ability to deduct charitable donations. Here’s one solution: Make a big onetime contribution to a charitable gift fund, so you’re able to itemize. From that account, you can then slowly dole out money to your favorite charities.

3. Jumpstart a new account. If your household budget is stretched, it can be hard to save. That’s why year-end bonuses provide the perfect opportunity to build momentum with a new account. This might be a simple household emergency fund, a Roth IRA or a 529 education savings account for your children. An added bonus: The new tax rules now allow you to use 529s for K-12 expenses.

4. Invest in your house. Your own home is a unique investment because it’s an asset that usually grows in value over time, while also providing you with a place to live. For that reason, I see home improvements as worthwhile, because they deliver value on both counts.

5. Invest in your health. Everyone knows that health clubs love January. That’s when New Year’s resolutions cause people to buy new memberships that they end up rarely using. Why do so many people give up on the gym? One reason is the inconvenience of getting there. That’s why I think it’s smart to invest in something like a treadmill or a bicycle for your home. Yes, the price tag might seem high, but you’ll pick up valuable time in your day and I’m confident you’ll use it far more than your abandoned gym membership.

6. Invest in your skills. One of the ironies of life is that all of our education is crammed into the first 20 or so years. But it doesn’t need to be that way. These days, you can take online courses at little or no cost. Your town probably also has its own adult education program, offering hundreds of learning opportunities for nominal fees.

7. Make a dent in your most annoying debt. There are lots of strategies for paying down debt. Here’s where I like to start: with the one that you dislike the most. Maybe that’s the high-interest credit card or store credit card that hits you with $35 late fees when you forget to pay your $30 balance. Or maybe it’s your student loans at 7% or 8%. Pick one to eliminate from your life and I think you’ll experience an instant boost in happiness.

8. Put things on your calendar. According to happiness researchers, you derive tangible enjoyment from looking forward to things. If you’re planning a trip for next summer, book it now, or if you’re having a hard time getting through the winter, plan some daytrips to get you through February.

9. Get a root canal. I’m not kidding. It’s so easy to put off such things. But if you have a medical problem that’s been giving you aches and pains, sacrifice a vacation day to take care of it.

10. Get a coach. Another irony of life is that we get all kinds of coaching as kids, but rarely get any as adults. Sure, you might have a boss, but that’s not the same. If you don’t have a trusted mentor, try to find a career coach. Unlike your family and friends, who probably know you too well, an objective professional will take the time to look at you holistically and give you honest feedback. I have seen this work wonders for people.

Adam M. Grossman’s previous blogs include First Things First, Grossman’s Eleven  and Ten Financial Principles . Adam is the founder of  Mayport Wealth Management , a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter  @AdamMGrossman .

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This Week/Jan. 7-13

REGAIN YOUR BALANCE. Calculate your portfolio’s split between U.S. stocks, developed foreign markets, emerging markets, bonds and so on. Compare your current allocation to your target portfolio percentages. Buy and sell to bring your portfolio back into line with your target weights—but try to trade in a retirement account, so you avoid triggering taxes.

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January’s Newsletter

WE’RE AN IMPATIENT LOT—and increasingly so. Who has time to read long articles, let alone entire books? Much of the time, all we want is the one- or two-line summary. Faced with that challenge, I’ve taken to boiling down my financial ideas to 140 characters or less.

HumbleDollar’s latest newsletter includes 41 of those ideas, which I hope will inspire, amuse and guide you as we sally forth into 2018. January’s newsletter also offers three financial steps to take in response to the new tax law, plus our usual listing of last month’s most popular blogs.

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Short and Sweet

AS I WAS PREPARING for HumbleDollar’s January 2017 launch, my web developer suggested I add a mission statement to the top of the homepage. That mission statement morphed into a daily insight, which then became a daily Tweet that also found its way onto my Facebook page. Like the family that moves from a three-bedroom house to a one-bedroom apartment, I embraced the challenge of shoehorning financial ideas into 140 characters or less.

Twitter has since expanded the allowable character count to 280, but I try to stick to the old 140 limit. I keep a running list of my daily comments and have vague plans to turn them into a book. But for now, here are 41 of those comments—some published, some yet-to-be published—that I hope will inspire, amuse and guide you as we begin 2018:

We get just one shot at making the journey from birth to retirement. Flirting with financial disaster is not advisable.
If you waste money, you can make more. If you waste time, life gets old really fast.
Picking superior investments is a crowded trade. Saving more is an easy win.
What’s the difference between an equity-indexed annuity and an index fund? One needs an army of salespeople. The other sells itself.
Want to feel short? Hang out with people who are tall. Want to feel poor? Hang out with folks who are rich.
If your kids can borrow it or your friends can admire it, it doesn’t count as an investment.
Draw up a list of your greatest pleasures in life. Then ask yourself: Do you need great wealth to enjoy any of them?
If your portfolio isn’t built around broad market index funds, you’ve got to ask yourself one question, “Do I feel lucky?” Well, do ya, punk?
When you’re ill, you realize how great it is to feel healthy. Money’s similar: When you’re broke, you realize how great it is to be solvent.
If you think money managers are overpaid, imagine how much they’d charge if they actually beat the market.
You want investments that you boast about when you sell—but you’re too nervous to discuss when you buy.
A boat is not your financial friend, but a friend with a boat is.
If you keep investing simple and make it understandable, you’ll lose half your audience, who assume success lies in their own befuddlement.
Never confuse the appearance of affluence with affluence. One is the mortal enemy of the other.
We are voracious acquirers of financial information, but mostly to buttress opinions we already hold.
If your children want for nothing, they have too much.
A quick way to lose half your wealth: Get divorced. The slower route: Marry someone with bad financial habits.
If folks claim their home has been a great investment, ask to see their detailed financial records—and their degree in advanced mathematics.
Whenever you open your wallet, you’re voting for one thing, but also voting against something else.
Invest based on dinner seminars, glossy brochures and TV advertisements, and you foot the bill for your own fleecing.
If you think today’s purchase will make you happy forever, you need to spend more time looking through your closets.
Everybody’s a long-term investor when the market is going up.
Is it time to have the talk with your kids? You know, the important one—about how much you’ll help with college costs.
Trying to beat the market is a game for the rich. Only they can afford the inevitable disappointing results.
Want to be free of financial worries? That hinges on the size of your bank account—and the magnitude of your wants and anxieties.
Cash value life insurance isn’t an investment, it’s a religion—and you’ll never meet a more prickly group of disciples.
If you save $5 a day for 40 years by not buying coffee, you’ll miss out on an awful lot of caffeine.
Overconfident investors trade too much, damaging their returns. But heartened by their brokers’ applause, they courageously carry on.
Dollar-cost averaging is for wimps. You’d be amazed how many rich wimps there are.
Forget this year’s stock market angst—and ponder the riches that will accrue to those who can ignore it.
Another year passes and still there are no inductees to the market-timing hall of fame.
It’s hard to know who is less truthful, teenage boys boasting of their sexual conquests—or middle-aged men touting their investment prowess.
What would happen if everybody indexed? Seriously? Are we really worried about a global outbreak of financial prudence?
Good news is bad news: When markets rally, our portfolios may grow fatter—but future returns will likely be lower.
We might retire from the workforce, but we should never retire from the pursuit of a fulfilling life.
Gold is like your crazy uncle at the wedding: He dances wildly—and he dances alone.
Your kids will grow up to imitate your financial habits. Will you like what you see?
If the answer necessitates making a short-term market prediction, you’re asking the wrong question.
The results speak for themselves—and that’s a problem for active money managers.
The big financial risk isn’t dying early in retirement but, rather, living longer than we ever imagined.
Our only earthly immortality will be the recollection of others. Make sure those memories are good.

A morbid aside: I’m able to schedule the new content for HumbleDollar’s homepage well in advance. This allows me to publish updates, even if I’m traveling or on vacation. One result: Should I go under the next bus, new insights will continue to appear at the top of the homepage—as well as on Twitter and Facebook—for months afterward. Thanks to the miracle of technology, it seems we’re now able to be productive, even in death.

Taxing Matters

SHOULD YOU MAKE ANY CHANGES to your finances in response to the new tax law? Three steps come to mind:

Make extra-principal payments on your mortgage. With the standard deduction now so much higher, and the itemized deduction for state, local and property taxes capped at $10,000, all that mortgage interest is likely saving you little or nothing in taxes, as I explained in a recent blog.
Rethink your strategy for charitable giving. Bunching two or three years’ worth of charitable gifts into a single year may allow you to itemize and get some tax benefit from your generosity. If you’re charitably inclined and over age 70½, also consider qualified charitable distributions from your IRA.
Revisit your estate plan. The federal estate tax exclusion has climbed from $675,000 in 2001 to $11.2 million in 2018, plus that exclusion is now “portable,” meaning married couples can potentially bequeath $22.4 million tax-free. Got an estate plan that’s designed to avoid federal estate taxes? There’s a good chance it needs to be revised—or there could be unintended consequences.

December’s Greatest Hits

HERE ARE THE SEVEN most popular blogs from last month:

Worse Than Marxism?
Courtside Seat (Part II)
Crisis? What Crisis?
Changing Seats
Hidden Gems
First Things First
Best Investment 2018

Also check out the most popular blogs for the fourth quarter and for all of 2017, as well as a slew of site updates I made at the end of December, including revisions to reflect the new tax law.

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Making Your Case

MRS. J. LIVED IN SOUTHEAST VIRGINIA and had purchased an eight-year-old truck at auction for her college-bound child. It turns out that the truck had spent its entire life in and around Rochester, New York, in the heart of the Rust Belt. Mrs. J. had been advised by her local garage that many of the exposed chassis components on her truck were covered in rust. Her neighbors’ cars did not exhibit this condition. She felt the truck was unsafe and that the vehicle’s manufacturer—my employer—owed her a solution.

After a thorough inspection, I began to explain that the truck was not unsafe, no defects were present and no warranty would apply even if there were. Mrs. J. began a vituperative crescendo that was majestic to behold. Each time she came up for air, her pronouncements increased by an octave, as she advised everyone within earshot of the wretchedness of my employer and the clearly impure breeding of which I was a result. She swore apocalyptic consequences for my recalcitrance.

The outcome was not positive for Mrs. J.  What about me? For my trouble, I got a story to share.

As a technical representative for my employer, I get to interact with customers who have a problem with their car and are unable to reach a satisfactory resolution with our dealer network. Having worked with a number of these customers over the years, I feel qualified to advise on what behaviors are helpful in reaching a happy conclusion.

It’s not convenient for anyone. You took time from your day to drive to the dealer and meet with a rep from the factory, when you’d rather be getting your nails done. I get it. The person dispatched to look at your car may be days away from home and has a pile of other pressing matters as well. Be prepared to present your case in a way that supports an efficient resolution. Which means:

Know what’s covered. It helps to peruse the tiny book that summarizes your warranty coverage. If you purchased a new car, it is in the glove box next to the owner’s manual, both no doubt still wrapped in plastic. No matter how much you paid, or how entitled you feel, that little book defines what you are owed with heartless precision. The warranty covers defects under specified conditions. Outside of those conditions, you may receive assistance with your problem. But you will need to explain why it is in the manufacturer’s best interest to help you. My first question will be:

Are you my customer? Applying out-of-warranty assistance is a business decision. If you have a history of purchases from the brand, and your car has been routinely serviced in the dealer network, you have set yourself up for special consideration. If you bought the car at auction, haven’t seen a dealer in 60,000 miles and you’re out of the specified warranty coverage, the problem you’re having is yours alone.

It is your burden to demonstrate the defect. Manufacturers are unlikely to attempt a repair for a problem that cannot be demonstrated. If the problem is intermittent, it helps if you have a detailed record of each occurrence, the conditions during which you noticed the problem and how the problem was resolved. This may help the inspector understand and diagnose your concern.

Tell me the truth. This is not my first rodeo. I have inspected hundreds, and perhaps thousands, of cars. Your car is speaking to me from the moment I approach it. Don’t tell me the seat stains just showed up when the seat belts and headliner tell another story. Don’t tell me the part simply fell off when the adjacent parts tell me there was an impact.

I once had a customer tell me that the scratches on his windshield “just showed up and must be a defect.” I stared at him in silence as his conscience went to work. When he finally apologized and told me what happened, I helped him with his problem. And not because I had to.

The issue is not a defect, but I still want it fixed. Sometimes the condition you object to is not a defect, but a design element you dislike. I am not allowed to make unauthorized modifications to your car. Even when I have nothing else to offer, your opinion can support changes that will improve future products or spur developments that may be applied to your car at some future date.

Be civil. Shouting at the person responsible for a final position on your case will rarely get you more than is absolutely required from the manufacturer. Disparaging remarks about me, my mother or my employer are never helpful. “I’ll never buy another one of your products” voids any interest I have in helping you and any hope you have of a positive outcome. If you have trouble keeping your cool, send a trusty advocate that can present your case in a civil way.

Expect the same in return. If you don’t get your desired result, it doesn’t necessarily mean the outcome was unfair. But if you are not treated with courtesy and respect, please report your experience to the manufacturer’s call center. Incivility is never appropriate, regardless of the cultural decay we witness daily.

We all want the same outcome. Auto (and most other) manufacturers work in very competitive marketplaces that are highly dependent on customer perception. If the issue with your product can be resolved in a way that makes you smile, the manufacturer wants that outcome. I want that outcome. I am looking for reasons to say “yes.” Help me find them.

When not paddling, biking or shooting, Phil Dawson provides technical services for a global auto manufacturer. He, his sweetheart Donna and their four extraordinary daughters live in and around Jarrettsville, Maryland.  His previous blogs were Course Correction, A Thanksgiving Prayer and Life After Amazon. You can contact Phil via LinkedIn.

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Hitting Refresh

WHERE DO WE STAND? That question is tackled at the beginning of almost every chapter of HumbleDollar’s online money guide—and I spent much of the past week updating the various statistics involved.

Check out the latest numbers from the worlds of borrowing, real estate and investing, including stock and bond market valuations. I’ve also updated the money guide’s sections on taxes and giving—the latter covers estate planning and charitable gifts—to reflect the new tax law. One major implication of the new tax law: Paying down debt is more attractive than ever, a topic I discussed in a recent blog.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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This Week/Dec. 31-Jan. 6

PUBLICLY COMMIT TO CHANGE. Ponder your behavior, decide how you’d like to improve—and then tell friends and family. On your own, you may not be disciplined enough to save more, lose weight and exercise regularly. But if you know that, by letting your New Year’s resolutions slide, you’ll look bad in the eyes of others, you’re more likely to persevere.

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