Jonathan Clements's Blog, page 444

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.

Zeroing In

BY THE TIME WE REACH our late 20s, we’ve made a set of fairly inflexible choices that dictate our ability to spend and save. Our career arc and earnings potential are established. Our debt from undergraduate and graduate programs has been accumulated. The number of dependents we’ll support is getting clearer. Changing any of these decisions is either impossible or mighty tough.

But there’s a second tier of financial choices that are in constant flux—and where we have the greatest flexibility to influence our spending and saving. Remember, spending and saving are a zero-sum game, so it’s all about tradeoffs: If I spend X, I can’t save Y. If I purchase Q, I won’t be able to afford R. If I prioritize M, I need to forgo N.

My wife and I discuss these tradeoffs as we make spending decisions. For us, it means that, even though we hate cleaning the house (and who doesn’t?), we aren’t ready to spend $150 a month for a cleaning service. Instead, we’d rather allocate these dollars to a larger grocery budget, knowing that we often choose to shop at Whole Foods and specialty stores. More recently, we started regularly donating to our favorite charities. This has meant reducing our monthly entertainment spending to offset the contributions.

Want to make these sorts of tradeoffs? Consider the potential value-add of any expense. Sometimes, it’s negligible or negotiable. I am happy to forgo an expensive gym membership and, instead, use a budget-priced, no-frills gym. It just doesn’t greatly impact my overall experience.

On the other hand, Sarah and I still buy paper copies of every book we read. While we’d save money with e-books and even more with a library card, we love owning books. The $50 a month we spend on books feels like it’s worth the joy it brings. In other words, budgeting doesn’t always mean choosing the most frugal option. But it does mean recognizing that, with every spending choice, we give up the opportunity to use the dollars for something else.

Zach Blattner’s previous blogs include Money Pit and Unexpected but Predictable. Zach is a former teacher and school leader who now teaches teachers across the Philly/Camden region 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.

The post Zeroing In appeared first on HumbleDollar.

Contain Yourself

WE’RE USED TO SEEING MONEY as one of life’s limiting factors. But if you receive a financial windfall, money may no longer be the limitation it once was. While that might sound liberating, it can also create anxiety. The reality is, constraints serve a useful purpose: They provide structure. Without that structure, you may find yourself feeling rudderless.

I experienced this when I received a windfall several years back. I remember walking into an Apple Store, with the intention of buying something just because I could. After wandering around for a few minutes, though, I walked out empty-handed, realizing that there was nothing I needed or even wanted.

If you find yourself in this situation, without the structure of normal budgetary constraints, what should you do? It took a while to find my way, but here’s an approach that seems to work well:

Don’t sign on any dotted lines. If your windfall hits the news, your phone may start ringing with pitches from brokers and other eager vendors. My advice: Ignore them. Ultimately, you might want to hire a financial advisor, but it’s best to conduct that search on your own terms. Don’t just choose the advisor who happens to be quick enough to call first. In fact, his or her speed in contacting you may indicate that the advisor puts more energy into hunting for new clients than helping existing ones.

Set priorities. Spend time by yourself—or with your spouse—creating a high-level allocation for the funds. Engage in some soul searching. Ask yourself what goals are most important. Then, assign dollars accordingly. These might include retirement savings, gifts to family, charity, a rainy day fund and major one-time purchases, such as a new home. You could also allocate a portion to serve as an “endowment” to support ongoing living expenses.

Recognize that sleeping at night is a valid goal. You may want to allocate extra “safe money” to ensure peace of mind, regardless of the market’s ups and downs. I know one windfall recipient who insists on keeping $1 million in her checking account. That might sound extreme, but these choices are entirely personal and subjective.

There is no perfect recipe for managing a windfall. Still, by introducing structure like this, you should find yourself achieving more of your goals, with less stress.

Adam M. Grossman’s previous blog was Take It Slow.  Adam is a Boston-based investment advisor. An advocate for financial literacy, he regularly teaches an adult education class titled “You Can Outsmart Wall Street.”

The post Contain Yourself appeared first on HumbleDollar.

This Week/March 12-18

DROP UNNECESSARY INSURANCE COVERAGE. If you no longer work or have more than enough saved for retirement, you can likely ditch your disability insurance. If the kids have left home or you have a sizable nest egg, you might drop your life insurance. If your car is old and doesn’t have much value, you might get rid of your auto policy’s comprehensive and collision coverage.

The post This Week/March 12-18 appeared first on HumbleDollar.

Another Darn List

WE TRY NOT TO BE TOO JUDGMENTAL here at HumbleDollar. But if any of the items below apply to you, you might want to get yourself to the financial emergency room. Here are 33 signs you could be in trouble:

You save on eating out by attending free financial seminars.
You earn extra income by purchasing mutual funds just before they make their distributions.
All your stocks are penny stocks, but they weren’t when you bought them.
Your insurance agent is your best friend.
You’re investing in real estate—by remodeling the kitchen.
Your broker saves you money by only recommending funds with “no initial sales commission.”
You have $1 million in life insurance and no financial dependents.
Shopping is your favorite hobby.
You deduct a staggering amount of mortgage interest each year.
You’re confident you are well-diversified, because you have five different brokerage accounts.
Your friends are envious of everything you own.
You figure inflation is too low to worry about.
Your accountant whistled when he saw the size of your capital loss carryover.
You get your stock picks from your spam folder.
You’re absolutely certain the market is headed higher.
You just rented a second storage locker.
Every fund you buy has great past performance.
You had a will drawn up years ago, so that’s one less thing to worry about.
Your kitchen looks like a showroom for “as seen on TV.”
If others are selling, why would you buy? You weren’t born yesterday.
You never fail to make the minimum credit card payment.
You cosigned your son’s $80,000 college loan to study social work.
You plan to claim Social Security early and use the money to buy income annuities.
You would dearly love to invest in a hedge fund.
You know your house has been a fabulous investment, because it’s worth so much more than your down payment.
There’s an equity-indexed annuity in your IRA.
You never understood why they call options trading a less-than-zero-sum game.
Your financial advisor is a fiduciary, but only part of the time.
You don’t bother funding your 401(k) with its matching employer contribution, because you have a cash-value life insurance policy.
Your children want for nothing.
Your employer offered a lump sum instead of paying you a pension, and it was obvious the lump sum was the better deal.
You own a diversified portfolio of timeshares.
You like to have a margin of safety, so you always buy the highest-yielding bonds.

The post Another Darn List appeared first on HumbleDollar.