Jonathan Clements's Blog, page 427

Running in Place

OUR STANDARD OF LIVING has more than doubled over the past four decades. Has all that money bought happiness? Not a chance. In 1972, 30% of Americans described themselves as “very happy.” As of 2016, we’re still at 30%, according to the latest General Social Survey.

Over the 44 years, there was a slight uptick in those describing themselves as “pretty happy” and a tiny decline in those who said they were “not too happy,” but neither change was significant. Meanwhile, over this 44-year stretch, inflation-adjusted per capita disposable income rose 120%.

Why hasn’t our improved lifestyle made us happier? There are three key explanations. First, and most important, we tend to adapt to improvements in our standard of living. Our initial delight at, say, a new purchase or a pay raise quickly gives way to dissatisfaction. Second, we focus not just on our absolute standard of living, but also on how we compare to others—and, for most of us, there will always be plenty of folks who have more. Third, we simply aren’t very smart in how we use our money.

What to do? Check out HumbleDollar’s advice on how to squeeze more happiness out of our dollars, as well as our lists of nine simple strategies for a happier life and five takeaways from happiness research.

The post Running in Place appeared first on HumbleDollar.

Say It Forward

A FEW MONTHS AGO, my retirement account hit a milestone—$250,000. I’d been looking forward to achieving “quarter-millionaire” status for a while, so when it finally happened, I decided to announce it on social media. I took a photo of my computer screen, with the value of my account highlighted, and uploaded the photo. Just as I prepared to make the post public, I decided to obscure the actual balance and edit the text to say my account had reached a “new personal record,” instead of revealing the specific amount.

But why?

I’ve never been reluctant to boast about my other accomplishments. Whenever I win an award at one of the many shooting competitions I attend, I’m quick to brag about it on Facebook. Now, having achieved a personal financial goal, I chose instead to announce it subtly and without specifics.

On any given day, most of us can log on to our social media site-of-choice and read more details about our friends and colleagues than we care to know. People are eager to share what restaurant they’re eating at or talk about the fancy new electronic gadget they just acquired. But the financial details of these transactions are almost always missing. That photo of your friend, happily posing with the family’s new sports car, likely doesn’t include a copy of the transaction’s bill of sale.

A recent study highlighted how deeply conflicted most of us are when it comes to talking about money. A group of university students—who were intending to pursue careers as financial planners—were surveyed about their financial attitudes: There was a stark difference between their personal beliefs and actual behavior. While most thought discussions about money should be active and open, the majority didn’t discuss their own finances with friends and, if they did share information, admitted they were uncomfortable doing so.

Our inability to talk openly about financial topics has resulted in a society that’s left to guess how our own financial status stacks up against others. Outward appearances can be deceiving—friends and acquaintances may seem to be living a life filled with “champagne wishes and caviar dreams”—but a glimpse at their net worth might reveal a financial nightmare. Conversely, there are plenty of anecdotes about men and women who appear impoverished, but who have actually amassed personal fortunes worth millions of dollars.

By keeping financial topics out of the public domain, we now have a society where a majority of Americans can’t make an educated guess about how much money they might need to retire. Without such a goal in mind, how can we expect people to shift their spending and savings habits accordingly? If each of us made a concerted effort to discuss money matters openly, we might discover financial opportunities available to us that we weren’t previously aware of. If we openly shared our account balances and salary information, we might inspire our friends and family to make changes in their own financial habits. As for myself, I’ll start with a pledge: When I officially become a “half-millionaire,” I’ll post it on Facebook for everyone to see.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. She enjoys competitive pistol shooting and hanging out with her dog Zoey. Her previous blogs include Wanting for Something and Where It Goes.

The post Say It Forward appeared first on HumbleDollar.

Smooth Talker

AS INVESTORS FLOCK TO STOCKS in search of heady returns, this is a good time to think about risk. Remember, nobody has a clue how stocks will perform over the short-term, so it’s best to focus on things we can control—namely investment costs, taxes, risk and our savings rate.

Short-term risk is often assessed using beta and standard deviation. I just added a section on those two volatility measures to HumbleDollar’s money guide. While researching the new section, I came across Portfolio Visualizer’s helpful matrix spelling out the correlation between major asset classes. At the site, you can also find the correlation for two or more investments of your choosing.

How do you read the numbers? Correlation coefficients range from -1 to +1. If the correlation between two investments is +1, they rise and fall in sync. If it’s zero, there’s no correlation, while a -1 correlation coefficient indicates they move in opposite directions. If you combine investments whose returns aren’t closely correlated, you should find the resulting portfolio less nerve-racking to own.

Depending on the investments you choose, the price of that smoother ride may be lower long-run returns. In other words, adding bonds to a U.S. stock portfolio can reduce volatility a lot, but it’ll also hurt returns. By contrast, adding foreign shares to a U.S. stock portfolio will reduce volatility only modestly, but it probably won’t put much, if any, dent in your long-run returns—and it could help.

The post Smooth Talker appeared first on HumbleDollar.

Tick, Tock, Take Stock

AS A CHILD, I thought my father had a memory problem. He had a habit of repeating stories and sayings. It made me feel sad, until I figured out it was intentional. He didn’t believe in bells: School was never out.

“Make it a habit to keep and grow some of the money you make,” was one of Dad’s sayings. I was reminded of it recently, after reading that seven out of 10 Americans have less than $1,000 in their savings account—the sort of place you might turn if you have a financial emergency. It seems keeping and growing money is infinitely harder than earning and making it.

I am glad I recognized that early on, and started an automated wealth-building program right out of college. Author David Bach popularized this winning strategy in his bestselling book The Automatic Millionaire. What both Bach and Dad seemed to understand is that cash in hand is a bad plan.

I have trouble holding onto money that isn’t saved or invested. Perhaps you do too. It always seems to vanish for one reason or another. Maybe that’s why Warren Buffett advises, “Do not save what is left after spending, but spend what is left after saving.” That’s the power of automatic saving and investing. If I don’t see it, I won’t miss it.

And if you don’t get into the habit of keeping a part of what you earn and putting it to work, you lose a second and even greater opportunity: the opportunity to grow your money over time.

What people don’t always appreciate about compound interest is it is always working for you or against you. If you choose to forego the opportunity to earn interest, it’s an enemy. Let’s say you save $50 a week for 30 years. Without interest, you will have $78,000—and even less once inflation is factored in. But if the money earns 6% compounded annually, it will grow to $218,798. If it earns 8% compounded annually, it will grow to $325,593. It’s math. It’s education. It’s automation. Tick, tock, take stock in the compound clock.

Sam X Renick ’s previous blogs were How to Keep All Your Earnings and Raising Money-Smart Kids. Sam is the driving force behind the “It’s a Habit” Company and its chief spokesperson, Sammy Rabbit , who is dedicated to improving children’s financial literacy. Sam has read and sung off key with over a quarter million children around the world, encouraging them to get in the habit of saving money.

The post Tick, Tock, Take Stock appeared first on HumbleDollar.

This Week/March 26-April 1

IMAGINE STOCKS PLUNGED 30%. That’s not a prediction, but it is always a possibility. Think about your portfolio’s loss in dollar terms, so it seems more real. Ponder whether the financial hit would unnerve you—and whether it would imperil any upcoming goals. If the answer is “yes,” you might want to lighten up on stocks.

The post This Week/March 26-April 1 appeared first on HumbleDollar.

What It Takes

SAVING DILIGENTLY sounds like such a rudimentary skill that it gets scant respect. Who couldn’t spend 10% or 15% less than they earn, so they set aside a little money for the future? And yet the U.S. savings rate remains miserably low and many folks are pitifully ill-prepared for retirement.

The reality: Saving money may be simple but, clearly, it isn’t easy. What does it take? Here are six key ingredients.

1. There’s the obvious: We need an income. The more we earn, the easier it should be to save. But it doesn’t always work out that way. I have met many folks with modest incomes who sock away impressive sums, and others with fat paychecks who manage to save very little.

2. Low fixed costs. Why do many families fail to save? Often, they simply can’t, because they’ve boxed themselves in with a litany of monthly fixed costs, everything from mortgage payments to insurance premiums to recurring fees for phone, internet, cable, music streaming and more. Result: They have so little financial wiggle room that it’s almost impossible to save.

3. Self-control. Even with low fixed costs, saving can be a struggle, because temptation abounds. When something catches our eye, we need to squash the impulse to immediately open our wallet. By delaying gratification, we’ll have time to consider whether it’s truly money well-spent. For some, this is easy. For many, it’s hard—in the same way it’s hard to eat less and exercise more.

For instance, if I’ve had a long day banging away at the computer keyboard, I’ll often forget all my good intentions, and reward myself with some unhealthy food and a glass or two of wine. For others, spending serves the same purpose. It makes them feel better in the moment, even if they won’t feel good when the credit card bill arrives.

4. An aversion to financial stress. Spending may give us a short-term thrill. But excessive spending can also lead to ongoing financial stress, as we discover we can’t pay the credit card bill and maybe not even the rent. As we come to appreciate how terrible that stress can be and how great it feels to have our finances under control, spending can lose its allure.

5. Self-reflection. When we’re young, it isn’t surprising that we spend too much on items that deliver little happiness. We simply haven’t had time to learn from experience.

But as the spending disappointments pile up, we gradually come to appreciate how little happiness we receive from our purchases. Self-control is no longer a problem, because the goodies no longer seem tantalizing. The sooner we get to this point, the easier it’ll be to lasso our spending and get on the right financial track.

6. A fondness for our future self. If we spend money today, we can’t spend it tomorrow, let alone in 30 years. If we’re rational, we would care more about the future when we’re younger, because there’s potentially so many years ahead of us. But ironically, it seems our concern for our future self grows as we get older.

The post What It Takes appeared first on HumbleDollar.

Small Changes, Big Dollars

I’M ALWAYS ON THE LOOKOUT for easy ways to improve my finances. Here are five simple strategies I use:

1. Open a high-yield savings account. The interest rate on a regular Bank of America savings account is 0.01%. Ally Bank, on the other hand, offers 1%, almost a full percentage point more. For a savings account with $10,000, that’s the difference between earning $1 a year and $100, and it takes just 15 minutes to set up.

2. Maximize credit card signup bonuses. The Chase Sapphire Preferred, often a go-to card for those getting into the points game, offers a 50,000-point bonus for spending $4,000 in the first three months you carry the card. The Points Guy values those points at 2.1 cents each, translating to $1,050 in airline and hotel credits. To hit the minimum spend, ask friends if you can pay the tab with your card and then have them use Venmo to pay you back.

3. Work with friends to collect referral bonuses. The advisory fees on my Wealthfront account are waived on the first $20,000, because I referred three friends to the service, with another on the way. Similarly, Chase Sapphire Preferred will throw you 10,000 points for each new cardholder you refer, up to a maximum 50,000 points.

4. Buy family plan streaming packages. For the longest time, my fiancée and I were paying $10 a month each for Spotify, until we realized the family plan—which has six slots—only costs $15. We promptly switched over, saving $5 a month and offering free seats to the rest of our family. Netflix has a similar pricing structure: $8 gets you one “screen,” but for $12 you can have four people use the account.

5. Collect change in a jar and then use it to splurge once a year. Every August, my fiancée and I empty our change jar and spend the proceeds on dinner at Balthazar in Manhattan. (Don’t worry, we first convert our coins to folding money.) Usually, this covers at least $100 of our meal—giving us a guilt-free fancy dinner.

Steven Aguiar’s previous blogs were Going It Alone and Why I Invest With a Robo-Advisor. 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.

The post Small Changes, Big Dollars appeared first on HumbleDollar.

Wanting for Something

WHEN I CREATE MY MONTHLY BUDGET, I subtract expenses I deem to be “needs” from my take-home pay. What’s left is money I can spend on items I desire—my “wants.” For budgeting purposes, I divide my discretionary income into four equal amounts and budget that amount for each week of the month. Psychologically, I find it easier to keep my budget on track if I can see how much I spend on a weekly basis.

For things I want, I don’t have discrete spending categories, like I do for necessities. Instead, I focus more on staying within my overall budget. If I overspend on my hobbies one week, I know I need to cut back in another area, like eating out. In looking over my budget for the past couple of months, it’s obvious where most of my discretionary income goes:

Hobbies: My primary hobby is competitive pistol shooting. Nearly every weekend, I compete at a match. Between maintenance of my equipment, travel expenses and entry fees, my hobby easily eats up the largest portion of my discretionary budget. I have, however, figured out ways to make my money go further. By serving as a volunteer at matches, the hosting clubs usually provide me with free entry. I also write articles for a national shooting club’s magazine, which provides me with a small stipend.

Entertainment: I subscribe to the most basic cable package available in my area. By bundling internet and television subscriptions, I get both services for less than either as a stand-alone. Thanks to my Amazon Prime subscription, I have access to thousands of movies and television shows I can stream through my Roku. And, as a fan of the UFC, I occasionally indulge my passion for the sport by springing for a pay-per-view fight.

Dining Out: Unlike the average American—who spends more on dining out than on groceries—I tend to spend very little eating at restaurants. During the month, I might eat out as many as five or six times, or as infrequently as once or twice. I’m far more likely to spend my food money on quality meat and produce that I prepare myself.

My Dog: I admit I like to spoil my corgi. Buying her dog treats, and the occasional new dog bed, makes me happy, and Zoey doesn’t seem to complain about the treatment.

Clothing: I’m fortunate to have a job where I can dress casually. My clothing budget is minimal, and I can’t remember the last time I paid full price for an item of clothing. End-of-the-season sales are a girls’ best friend.

As with my “needs,” being frugal comes into play with my “wants.” My overriding goal: Maintain a healthy financial balance between saving for the future and having fun in the present.

Kristine Hayes is a departmental manager at a small, liberal arts college in Portland, Ore. She has an M.S. degree in biology, and hopes one day to retire and become a fulltime writer. Kristine’s previous blogs include Where It Goes and A Less Taxing Time.

The post Wanting for Something appeared first on HumbleDollar.

This Week/March 19-25

ROUND UP THE MORTGAGE CHECK. If you’re paying $1,512 a month, send the mortgage company $1,600 instead. It’s a painless way to increase your monthly savings, the extra $88 a month could allow you to pay off your mortgage years earlier, and you’ll earn a pretax return equal to your mortgage’s interest rate. That rate will likely be lower than the long-run return on stocks, but it should be better than you can get with high-quality bonds and certificates of deposit.

The post This Week/March 19-25 appeared first on HumbleDollar.

Take It to the Limit

WE IMAGINE WE FINALLY have everything sorted out, only to wake the next morning with a gnawing sense of uncertainty, plus the milk’s sour and we’re out of coffee.

Welcome to the human condition.

We lead lives bounded by limitations, some self-imposed and some imposed on us. Here are just 15 of the obstacles we face:

No accomplishment leaves us happy and satisfied for long.
Our days are numbered, but we don’t know the count.
Next week, the house will need to be cleaned again.
We hunger to relax, only to hanker for activity.
We do foolish things to feel better in the moment: smoke, gamble, drink too much, take drugs, eat badly, spend excessively.
We think we know others, but we only ever know part of their story.
Today’s proudly purchased possessions elicit tomorrow’s ho-hum.
We have unwavering trust in our own unreliable memories.
We keep having to stop for sleep and sustenance.
We’re surrounded by lesser mortals, who refuse to see things our way.
Our bodies fail us gradually, and sometimes all too quickly.
After we cross the finish line, another appears in the distance.
We think we’re rational, but much of the time we aren’t thinking straight.
For any given activity, there’s a 50% chance we’re below average.
Today’s issues seem so important. A year from now, we can’t imagine why.

Some of these constraints are beyond our control. Some offer the possibility of self-improvement. At a minimum, we should strive for a sense of perspective, so our days aren’t marred by too much self-inflicted nonsense.

The post Take It to the Limit appeared first on HumbleDollar.