Jonathan Clements's Blog, page 91

The Money Tournament

MARCH MADNESS IS upon us, with millions of sports fans rooting for their favorite college or university basketball team. For your team to win, all other teams in the tournament must lose—a zero-sum game. We accept this as part of the sport.

What’s that got to do with finance? Household economics can be a similar win-lose tournament. But it’s a zero-sum game that’s rarely acknowledged.

Relative purchasing power. In the U.S., we have some 130 million households that collectively possess roughly $150 trillion in wealth. We hear a lot about macroeconomics and government spending. But ultimately, all wealth is held by individuals.

Arguably, what matters is relative purchasing power, meaning your wealth compared to the rest of society. We compete against each other for the ability to purchase goods and services. Winning in life’s money tournament means you’ve managed to increase your very tiny percentage of national wealth.

Players on your team. Your household may have four players on your money tournament team.

First, all of us participate in the economy as consumers. We must deal with the constant changes in the price of goods and services. Second, we may participate as workers, vying to get a paycheck that keeps up with a growing economy.

Third, we might be stockholders, which means we take on the business credit risk that can drive share prices up and down. Finally, we might also be bondholders, so we’re subject to interest rate risk, with bond prices going up or down as rates change.

Play-by-play coverage. The players on your household team are winning and losing all the time. Indeed, if you listen to the news, you’ll often hear play-by-play commentary that tells you how your players are faring.

For instance, if the latest news indicates economic strength, you might be winning as a worker and a shareholder, while the resulting inflation and higher interest rates might hurt you as a consumer and bondholder.

What if the economy weakens? The roles are reversed. You might be winning as a consumer and bondholder, but suffering as a worker and shareholder.

Similarly, tax law changes and new government spending programs create winners and losers. Are others benefiting from tax cuts or new spending programs? You may find your relative societal position has deteriorated.

Cultural denial. The win-lose, zero-sum nature of sports tournaments is considered normal. But it strikes many folks as unsettling when it’s applied to the economy. With economic issues, it’s more comforting to use terms like “we” or “win-win,” while ignoring the potential losers inherent in any economic change.

How much to play? Once people have satisfied basic needs, they’re free to choose the degree to which they play in the money tournament. Some are willing to put in long hours or take high risk to advance in the tournament. Others prefer less work, less stress and less risk as they try to increase their relative purchasing power, and they might even be willing to see their share of the economy’s bounty shrink. It’s a decision each of us must make.

But whatever we decide, we should think carefully about the composition of our money tournament team. A worker may also want to be a bondholder, thus hedging against the risk of recession and possible layoffs. Meanwhile, a retiree may also want to be a stockholder, thereby hedging against the risk of inflation.

Tom Welsh is a certified management accountant in Raleigh, North Carolina. He has been the chief financial officer at several manufacturing companies and is founder of  Value Point Accounting , where he helps businesses manage product and customer profitability. Tom can be reached at  tomgwelsh@valuepointaccounting.com . Check out his earlier articles.

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Give While You Live

MANY FOLKS DELAY financial gifts to family and charity until their death. But I advocate a different approach: giving generously during our lifetime, or what I like to call "giving with a warm heart, not a cold hand."

This not only transforms the lives of the recipients, but also enriches those who give, making their lives more meaningful and fulfilling.

One of the most compelling reasons to give during your lifetime: You get to see the impact of your generosity. Unlike bequests and end-of-life giving, donating while you’re alive lets you witness how your contributions help family, change lives, support communities or drive progress in causes you’re passionate about. This immediate feedback can be incredibly rewarding and can even guide further giving, shaping it so it has greater impact.

Giving also fosters connections with those you’re helping. Whether it's through charitable organizations, community projects or individual support, you become part of a story of change and improvement. These connections can deepen your understanding of the lives of others and build bridges across communities.

On top of these emotional benefits come financial advantages. By strategically donating, you can enjoy tax benefits while still alive, potentially allowing you to give even more. Charitable donations can be tax-deductible and are immediately removed from your estate, providing a financial incentive to give now rather than later.

For those with substantial wealth or a deep desire to give back, setting up a charitable trust or foundation can be a way to manage how your assets are used for good, ensuring a lasting impact that reflects your personal values and goals.

Still, while the financial benefits can be significant, giving will always leave you with less money than before. So why give? I believe the greatest benefits are psychological.

There's a profound sense of joy and fulfilment that comes from giving. Studies have shown that altruism not only benefits the receiver, but also significantly boosts the happiness and health of the giver. This phenomenon, often referred to as the "helper’s high," arises from contributing to the well-being of others, reinforcing the concept that generosity is as good for the giver as it is for the recipient.

Giving now also allows you to craft and witness your legacy in real time. This can be particularly meaningful for those who want to ensure that their wealth is doing good according to their principles and vision. It's a way to shape how you're remembered, not just in terms of wealth, but in the values you championed and the differences you made.

For those who have accumulated “more than enough,” there's a growing debate about the moral responsibilities that come with it. By choosing to distribute wealth throughout your life, you're actively participating in reducing inequality and addressing immediate needs, rather than hoarding resources until after death.

Giving with a warm heart, not a cold hand, isn't just a philanthropic strategy. It's also a lifestyle choice that can enrich the giver's life immeasurably. It breaks the traditional mold of wealth distribution, encourages active engagement in societal improvement, and brings a host of emotional, psychological and financial benefits.

By choosing to give now, you aren’t just investing in others. You're also investing in a richer, more fulfilling life experience for yourself. So, why wait? The time to make a difference is now, with a warm heart that truly feels the joy of giving.

Dan Haylett is a financial planner and head of growth at TFP Financial Planning, a U.K. firm that specializes in modern-day retirement planning. Dan’s “pull back the duvet every morning” purpose is helping clients spend their time and money on what’s truly important to them. A version of the above article first appeared on Dan’s website, where you can also learn about his Humans vs. Retirement podcast. Follow him on X (Twitter) @DanHaylett. Dan's previous articles were Seven Reasons to Work and The Changes Ahead.

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They Pitched We Swung

WHEN I FIRST CAME across HumbleDollar, I just lurked on the website, convinced that everyone knew more about investing and personal finance than me. After a while, I started making occasional comments.

Finally, I’m ready to share some of my financial stories. My first topic relates to my misadventures with real estate limited partnerships. Note that all references here are to my then-wife, not my current wife.

I was in my first job as an engineer. It was the mid-to-late 1970s, and I worked for a relatively small consulting company. I was good at my job and quickly gained both the respect of colleagues and more responsibility. One day, the company’s owner asked me and several other principals—all of us were young and in our first jobs—if we were interested in joining in a partnership that would “own our own building” and that would pay us rent.

In short order, a group of us agreed to join this partnership and individually borrowed money to participate in this grand adventure. Land was purchased and construction began on an office building and a test laboratory that would house our operations, with plenty of room to grow. We were successful. Both our engineering services and test lab capabilities were in high demand almost immediately, and that high demand continued well into the 1980s.

For several years, the partnership members received substantial tax deductions. But there were uncomfortable signs, too. The company’s owner, who was also the general partner, was always terribly late generating IRS Form K-1, which was required for the limited partners to file their tax returns. As a result, we often had to file for an extension.

The next thing to happen was that the industry where we obtained most of our business went into decline. It was time to reinvent ourselves as consultants and develop new skills. That’s when we found out that our very profitable company was in trouble because the owner had extracted a huge amount of cash from the company. He’d also invested proceeds from our partnership in another real estate partnership, which was now in the process of collapsing.

These were hard times, and for several years we struggled mightily to keep both the company and the partnership afloat. By 1990, the mortgage holder sued the partnership to take ownership of the building, and we all had to pay our pro-rata share of the remaining debt. In addition, our employer failed, and we had to find new jobs.

On the plus side, this was a long time ago. The bank payoff stung at the time but wasn’t devastating. Also, one of my clients offered me a job almost immediately after the company failed. The final plus: I managed to obtain several solo consulting contracts from past clients, which took some of the sting out of the whole ordeal.

Early on, while that first partnership was going well, the owners of the architectural firm where my wife worked asked if we’d be interested in becoming limited partners in the purchase of a downtown office building that would allow us to “own our own building” and collect rent. Sound familiar? This partnership included the renovation of an historic building that initially resulted in substantial tax credits and deductions.

Unfortunately, a similar financial downturn hit both the architectural firm and the partnership. My wife eventually left that company for a different job, but we were still part of the real estate partnership. The general partners made multiple cash calls that ultimately exceeded the total amount specified in the partnership agreement. We and a few other limited partners declined to pay the cash calls that exceeded the total specified in the partnership agreement, and later found out that the general partners commensurately lowered our ownership stake.

The ultimate insult came when the general partners, who were not real estate agents, negotiated a private sale of the building and kept a hefty sales commission for themselves, rather than including it in the partnership’s revenue. This further eroded our portion of the sales proceeds. Given the tax breaks, I’d say we broke even on the transaction, though it was just as emotionally trying as the first.

If nothing else, the two partnerships convinced me that owning rental property, regardless of how it was done, was something to avoid. Both events occurred at a time when my wife and I had barely started saving for retirement. We knew nothing about investing. We trusted our employers and believed they were looking out for our best interests. Our IRA and 401(k) investments were small compared to our partnership investments. The partnership investments also carried much greater liability.

Later, upon reading and studying investment articles, I learned that we fell into the trap of being overinvested in our employers, resulting in us being too dependent on the success of two small consulting companies. Inc. and other business periodicals have reported that many small companies fail in their first five to 10 years. My employer failed. While my then-wife’s employer still exists, the company has never grown as the founders thought it would.

The good news: We both managed to move on. We got new jobs, owned our home, raised two sons and began investing for retirement using index-mutual funds. Since then, I’ve kept my IRA, 401(k) and other investment accounts entirely in mutual funds and exchange-traded funds. It’s only recently that I’ve changed my holdings to include a few individual stocks. Still, I continue to be leery of putting too many eggs in one basket.

Jeff Bond moved to Raleigh in 1971 to attend North Carolina State University and never left. He retired in 2020 after 43 years in various engineering roles. Jeff’s the proud father of two sons and, in 2013, expanded his family with a new wife and two stepdaughters. Today, he’s “Grandpa” three times over. In retirement, Jeff works on home projects, volunteers, reads, gardens, and rides his bike or goes to the gym almost every day.

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Cool Has a Cost

I'M SITTING ON MY patio drinking coffee, as I do every morning before my wife and son wake up. I go to bed early and wake up before sunrise, so when I’m drinking my coffee, it’s still dark. This is a great time for me to think.

This morning, I’ve been thinking about Jordache jeans. For those of you too young to remember, Jordache jeans were the thing to own in the late 1970s and early 1980s if you were a teenager or in your 20s. They were tight fitting and expensive compared to other jeans, and they had Jordache printed in large letters on the back pocket, so you couldn’t help but know what jeans somebody was wearing. There have been other jeans since, but I don’t believe the impact of owning these particular jeans has ever been duplicated. It was magical. All you had to do was own these jeans and you were one of the cool kids.

I was introduced to the phrase “cool kids” by a woman I worked with. I think it describes perfectly those people in our lives we either wanted to hang out with or wanted to be.

I’d venture to say everybody in the world has known or currently knows their own version of cool kids. These folks are all different, but in our eyes they’re cool. I don’t think it matters how much money they have or how good looking they are, they just have that thing we want. It could be the popular jeans, the car we’ve always wanted, that house we admired growing up or the number of goats they own, assuming that’s the measure of wealth where you come from.

There will always be something we desire. We might buy it, it might remain on our “must have” list forever or we might move on to something new. Whatever the case, we feel we must have this particular item to feel good—and I think that’s fine, as long as our desire doesn’t end up doing severe financial damage.

When you’re a kid and the status symbol you want can be bought by your parents, that’s a good deal financially because you’re using OPM—other people’s money—to satisfy your desire. But once you're off the parental payroll and have to spend your own money, pursuing status symbols can get you in trouble. These status symbols don’t get cheaper as we get older. In fact, they tend to get ever more expensive.

I grew up on Long Island, New York. There’s a section of Long Island where the cool kids live. It’s called the Hamptons. This is a group of towns that are on Long Island’s South Fork, at the far end of the island. The most famous of these towns is Southampton. It’s not a gated community. You can drive through the town, but you probably won’t be able to drive up to any of the houses, because those do have gates.

But the non-Hamptons town I’d put on my personal bucket list is Sag Harbor. It’s an old whaling town that became an artists’ community. But it’s no longer a struggling artists’ community, but rather a rich artists’ community. People like the late Jimmy Buffett, of Margaritaville fame, have lived in Sag Harbor.

I first heard of Sag Harbor when I read John Steinbeck’s book Travels with Charley, which tells the tale of Steinbeck buying a new GMC pickup truck, along with a camper body to sit on the truck’s cargo bay, and then packing up and taking his poodle Charley on a cross-country road trip. Reading about this adventure made me want to travel across America, which I first did the summer before my college junior year and then again when I traversed the country on Lincoln Highway. Lincoln Highway is the road conceived in 1912 and which went from Times Square, New York City, to Lincoln Park in San Francisco.

For me, the interesting thing about Travels with Charley was that Steinbeck started in Sag Harbor. Why would he want to live on Long Island? Steinbeck was born and raised in California. Being a kid who was born and raised on Long Island, I always thought the cool kids lived somewhere else—like the Beach Boys did.

I first became aware of the Beach Boys thanks to a friend of my brother, who came to our house in 1963 with a new 45 RPM record of a song called Shut Down. From then on, the Beach Boys became my ultimate cool kids. California must be the place to live, I thought, since that’s where they lived. Apparently, all the good-looking girls lived there, everyone surfs and they have year-round tans. What could be better?

Years later, I traveled to where the Beach Boys’ Wilson brothers were raised, only to find out they grew up in a Long Island-style Levittown-type house far away from the ocean. They sang of surfing, hot rods and the party lifestyle—but what they sang about wasn’t how they lived. I was crushed.

Advertising and marketing can convince us that the thing that others are selling is what we need. Sometimes, it is. But not always.

David Gartland was born and raised on Long Island, New York, and has lived in central New Jersey since 1987. He earned a bachelor’s degree in math from the State University of New York at Cortland and holds various professional insurance designations. Dave’s property and casualty insurance career with different companies lasted 42 years. He’s been married 36 years, and has a son with special needs. Dave has identified three areas of interest that he focuses on to enjoy retirement: exploring, learning and accomplishing. Pursuing any one of these leads to contentment. Check out Dave's earlier articles.

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Thinking Anew

AMONG THE QUOTES wrongly attributed to Mark Twain is this one: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

This quip highlights one of the challenges of personal finance: that the data and the conclusions we rely on for decision-making can never be accepted with absolute certainty. That’s for a few reasons.

First, because the world changes and markets change, our approach must change as well. Second, academic research is necessarily imperfect. Because personal finance includes an element of human behavior, it can never be studied with scientific precision. Below are four areas where our understanding has evolved over time—and may evolve further still.

Market drivers. In the 1950s, a PhD student named Harry Markowitz developed a mathematical approach to building portfolios that’s now known as Modern Portfolio Theory. With detailed formulas, Markowitz showed investors how to build “efficient” portfolios—those which optimized the tradeoff between risk and return. For years, this approach was seen as the gold standard, and others built on it.

William Sharpe, a professor at Stanford University, developed a tool—now known as the Sharpe Ratio—to help investors compare the performance of different assets on a risk-adjusted basis. And Eugene Fama, a professor at the University of Chicago, proposed the idea that markets are “efficient,” meaning that stock prices adjust almost immediately to new information, making it virtually impossible to beat the market.

For their work, all three won Nobel Prizes in economics. More recently, however, a new school of thought has arisen. Behavioral finance, pioneered by Daniel Kahneman and Amos Tversky, challenged the old, strictly numerical approach. They were the first to argue that human emotion also plays a part in financial decisions.

Most notable among their contributions was prospect theory. Kahneman and Tversky found that when people experience a loss, it feels about twice as bad as an equivalent gain. This idea—that people are averse to losses—now seems intuitive, but it wasn’t previously understood. In the old world of Modern Portfolio Theory, investors were seen as being emotionless.

Since Kahneman and Tversky’s work, researchers have uncovered dozens that affect financial decision-making. One result: Many people now view behavioral factors as being at least as important in explaining market movements as traditional quantitative factors.

In making financial decisions, we should acknowledge that the market is only sometimes rational. That’s why it’s so important to develop an investment strategy that’s durable enough to carry you through those periods when irrationality takes over.

Diversification. In 1970, Lawrence Fisher and James Lorie published a paper titled “Some Studies of Variability of Returns on Investments in Common Stocks.” They wanted to better understand the dynamics of portfolio diversification.

Their conclusion: “95% of the benefit of diversification is captured with a 30 stock portfolio.” As a result, for decades, a portfolio composed of 30 stocks was viewed as a magic formula. To be on the safe side, many investment firms included 40 or 50, but anything in that neighborhood was viewed as sufficient to diversify away the risk posed by any one stock.

That thinking has changed. In 2017, Hendrik Bessembinder, a professor at Arizona State University, published a paper titled “Do Stocks Outperform Treasury Bills?” His finding: Between 1926 and 2016, just 4% of stocks accounted for all of the net gains in the U.S. stock market above the return of Treasury bills. In other words, the other 96% of stocks, as a group, did no better than Treasurys, which delivered about 2% a year. Bessembinder has since found that the same conclusion holds outside the U.S.

This completely upended investors’ thinking about diversification. Where earlier research focused on the downside risk posed by the underperformance, or even failure, of an individual stock, Bessembinder focused on an entirely different risk: the upside risk when a portfolio fails to hold one of the market’s star performers.

This is yet another reason index funds make so much sense. Thanks to their “own everything” approach, S&P 500 and total stock market funds held the handful of stocks in the 4% that led the market over the past decade. Just as important, they probably hold the 4% that will lead the market over the next decade.

Risk. When Markowitz developed the concept of an efficient portfolio, he chose portfolio volatility as his preferred measure of risk. Volatility is a statistic that measures the degree to which an investment’s price bounces around. Markowitz deemed portfolios with more variable prices to be riskier.

Using this yardstick, Markowitz then argued that there’s an ironclad relationship between risk and return. If an investor wants higher returns, he or she needs to accept more risk. Or if an investor wants less risk, that can only be achieved by settling for lower returns. This fundamental tradeoff was an accepted truth for many years.

But today, many see it differently, including hedge fund manager Seth Klarman. He’s argued that the use of volatility to measure risk is “preposterous” and that investors don’t need to take on more risk to earn greater returns. Klarman’s firm, Baupost Group, specializes in securities that are distressed and selling at steep discounts. In interviews, he’s argued that this approach reduces risk while increasing potential returns:

“You’re buying things that are cheaper, which means that you have less downside, and more upside…If [a stock trading at $6] suddenly falls to $3, does that make it more risky because it’s more volatile, or does that make it a ludicrously good bargain because it’s now trading for half the price, and you could only lose half as much and you could make way proportionally more if things work out?”

What does this mean for individual investors? The stocks that Klarman is referring to are called value stocks. And though they have underperformed in recent years, they’ve outperformed over longer periods. Klarman’s argument, in my view, provides a logical explanation for that outperformance. For that reason, a value-oriented fund may deserve a place in your portfolio, especially today, when the broader market is heavily tilted toward growth stocks.

Beating the market. For years, textbook finance aligned with Fama’s assertion that it was impossible to beat the market. Because prices adjusted so quickly to new information, there was no way to buy or sell quickly enough to get in front of those price movements. But in recent years, evidence has mounted on the other side of this argument.

Though it’s exceedingly difficult, a number of investors have proven it’s possible to beat the market, because prices don’t adjust as quickly as Fama argued. Numerous funds have demonstrated this: For years, Renaissance Technologies beat the market with computer-driven trading. Gotham Capital delivered outsized returns with old-fashioned, value-driven stock-picking. Fidelity Magellan Fund under Peter Lynch did it by identifying growth stocks. And most recently, Pershing Square Capital Management did it through shrewd market timing when COVID-19 knocked down markets in 2020. To be sure, it’s not easy to beat the market, but these funds do nonetheless disprove the theory of market efficiency.

Since such market-beating funds often aren’t available to everyday investors, what’s the lesson here for individuals? In my view, there’s a broader point: Because they disprove established research, they’re a reminder that we should be wary of any conclusion that seems too declarative. To be sure, academic research is useful as a guide. But it should never be seen as carved in stone.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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Asking Myself

WHAT’S THE BETTER choice? This is the perennial question for all of us, as we ponder how best to use our time, how to invest our savings and how to get the most out of the dollars we spend.

Want to lead a more thoughtful financial life? As I try to make better choices, here are five questions I find particularly useful.

1. Why would I stray from the global stock market’s weights? As I’ve mentioned a few times, my biggest holding is Vanguard Total World Stock Index Fund (symbols: VT and VTWAX), and my intention is to allocate even more of my portfolio to the fund in the years ahead. The fund owns every publicly traded company of any significance from around the world, offering—I believe—the ultimate in stock market diversification.

Why would I invest my stock market money in anything else? If I’m going to stray from a fund that offers the ultimate in diversification and does so at rock-bottom costs, the purchase would have to be pretty darn compelling. Like everybody else who pays attention to the financial world, I constantly hear about intriguing investments and I muse about whether they’d be good additions to my portfolio. But those musings don’t lead anywhere: It’s been years since I last bought a new investment.

2. If I were starting from scratch, would I hold my current portfolio? This is clearly related to the previous question. These days, not only do I find scant reason to buy any stock-market investment other than Vanguard Total World Stock, but also I’m sorely tempted to simplify my portfolio by unloading the other stock funds I own, such as those that target international small-cap stocks or U.S. large-cap value stocks.

These smaller positions have been a drag on my portfolio’s performance for more than a decade. But because their performance has been poor, I assume they’ll eventually have their day in the sun, and I can’t bring myself to sell until those happy days return. Am I being disciplined—or foolishly obdurate, imagining I know something that’s unknowable? I suspect the answer is “all of the above.”

3. How much should I have in bonds and cash? When many folks design their portfolio, they often begin by asking how much stock exposure they can tolerate or they simply adopt some prescribed asset allocation, such as the classic mix of 60% stocks and 40% bonds. But I favor starting with a different question: What’s the minimum sum—for practical and behavioral reasons—that we should each keep in bonds and cash investments?

To that end, retirees might calculate the amount that they’ll need to spend from their portfolio over the next five years, while those still in the workforce might decide how much cash they need set aside for emergencies and for, say, upcoming college bills, house down payments and remodeling projects. We might look at the resulting sum—which, in all likelihood, is all we rationally need to keep in bonds and cash—and then ask ourselves whether we should add a little more, so we can sleep better at night.

What about our other money? It could all potentially be invested in stocks. More than likely, if folks go through the above exercise, they’ll discover they could allocate more of their portfolio to stocks than they currently hold and far more than conventional wisdom suggests. For instance, when I run the numbers, I end up with a target allocation to bonds and cash of just 20%, equal to five years of 4% portfolio withdrawals. In fact, I currently have less than 20% in bonds and cash because I don’t envisage fully retiring anytime soon.

4. Will my kids want the possessions I buy today? The answer is, probably not. As they’ve grown older and pickier, Hannah and Henry have shown less enthusiasm for the “treasures” I offer. That means that, if I buy anything of lasting value, I’m buying it solely for my pleasure. Result? For a purchase to make sense, I need to be happy with the amortized cost over my lifetime, which is becoming shorter by the day. Needless to say, not many items make the cut.

That brings up a related question: What can I get rid of? Early in our adult life, we don’t just acquire many possessions we later regret. Often, we also acquire investments and financial accounts that soon clutter our financial life and become a nagging irritation. I’ve unloaded a surprising number of financial accounts and possessions over the past dozen years, but I feel I still have further to go. One positive sign: So far, I haven’t had any regrets about any of the stuff I’ve shed.

5. Am I using my time wisely? This is perhaps the question I ask myself most often. To be sure, it isn’t strictly a financial question, and yet how we use our time is inextricably linked to money, whether we’re looking to spend it or acquire more.

There are obvious time wasters, like following the stock market’s daily action, or brooding over some perceived slight, or standing in line at the Department of Motor Vehicles. These are all things I try to minimize.

But there are also bigger questions: In allocating my time, am I striking the right balance between helping others and pursuing my own interests? Am I putting too much emphasis on activities that make me money and not enough on things that I simply enjoy? If tomorrow I got a grim prognosis from my doctor, would I change how I use my time?

No, we shouldn’t be constantly fretting over the five questions above. But I do think there’s great value in quizzing ourselves about such things—because a little self-examination undoubtedly trumps a costly, unconsidered blunder.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.

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Money Buys Choices

AS I WATCH MY daughter gleefully play with her toes and stare in wonder as she turns the pages of a new book, I’ve never felt more fulfilled. The day she entered the world, I knew I’d finally found my true purpose.

I’ve always believed that money buys us choices, and I wanted a lot of choices and flexibility once I became a mom. My daughter, who is my firstborn, arrived eight months ago, and she forced me to reexamine my life’s priorities in the best possible way.

I started preparing financially for motherhood early in my career, when I was nowhere close to having children. In my first job out of graduate school at a global public relations agency in downtown Chicago, when I was in my early 20s, I lived paycheck-to-paycheck. As my income swelled thanks to promotions, bonuses and new employers, I made a conscious effort to live well below my means, piling up savings at a more rapid pace than most of my peers and avoiding the temptations of lifestyle creep.

In addition, I agreed to take jobs in different locations, which generated new opportunities and faster salary increases. At one employer, I lived in four states in five years, so I could take advantage of four unique roles that helped broaden my skill set and expand my network within the company.

On top of that, I only vacationed in places where I had the option to stay with family or friends. I took public transit, rather than cabs or Uber. My idea of fine dining was a pizza parlor. I shopped for home furnishings at antique shops and furniture liquidation stores. Was it all worth it? Absolutely.

Once my daughter arrived last summer and my maternity leave was in full swing, I found it harder and harder to imagine quickly returning to full-time work in the same capacity, especially given the extremely limited paid leave (if any) at most U.S. employers, and recognizing how critical the first year of life is for babies and their mothers.

After more than a decade working in the corporate world, I purposefully chose to step back from full-time work, taking a career break so I could focus on nurturing and caring for my daughter. It was one of the best decisions I’ve ever made, and I’ve been soaking up every second.

Stepping away from the traditional career ladder in my mid-30s, which is arguably the prime of my career, isn’t the norm. No financial advisor or career coach would recommend it. I was on the receiving end of numerous opinions, not all of them supportive of my decision. I fully respect those viewpoints. Yet, at the same time, I feel incredibly fulfilled that, at this stage of my life, I’m in the driver’s seat of my career and family. Time is a finite resource, and I’ll never get back this time with my daughter.

I’ve worked hard to build my career, and it’s an important part of who I am. That said, I have zero doubt that I’ll add more value in my professional job when I return to the workforce full-time. No one knows how to manage multiple deadlines, lead teams with conflicting personalities and juggle five crises at once better than a sleep-deprived mother tasked with caring for an infant 24/7.

Today, I’m COO of my family because of the choices I made in my 20s: living below my means, maintaining a frugal mindset, saving diligently, carefully negotiating every pay raise and job offer, and prioritizing building a healthy emergency fund. Temporarily stepping away from the work world comes with obvious financial repercussions, long-term career implications and challenging (and sometimes exhausting) days as a parent.

Still, I have zero regrets. I didn’t want to reach retirement age with more money and a more impressive job title, and yet desperately wish I’d had more quality time with my kids. As we all know, you can’t turn back the clock.

Parenting may not come with congratulatory emails for a job well done, promotions, bonus statements or annual raises, but it has given me my daughter’s first smile and laugh, her joy at rolling over for the first time, and watching her radiate with happiness whenever I sing to her. That’s all infinitely better than any bonus I’ve ever received.

I can always work more. But the time with those who matter the most to me is precious and fleeting. As someone told me before I became a mother, “If you’re lucky, you may share 18 birthdays with your child—and then they’re gone. Cherish them.” I couldn't agree more. As I hold my beautiful, smiling daughter while she watches my every move, I know these moments are priceless.

Brenna Clairr Moore was born and raised in Anchorage, Alaska, and currently resides in Dallas with her husband, daughter, cat and dog. She has nearly 15 years of experience working in corporate communications and public relations across numerous industries, including energy, consumer packaged goods, higher education and financial services. Brenna Clairr holds a bachelor’s in broadcast journalism from Northwestern University and a master’s in strategic public relations from the University of Southern California. She’s passionate about strengthening her community, and serves on the boards of her local YMCA and the Northwestern University Alumni Club in Dallas-Fort Worth. She believes that everyone—no matter their background—has a story that’s worth sharing.

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Money in the Middle

OUR COURTSHIP WAS both ripe with joy and fraught with tumult. One scene is emblazoned in my memory. Alberta and I had just finished lunch on the grass in front of the campus cafeteria. I was slumped over, exhausted by the frantic academic scramble to get published and disillusioned by the political intrigues.

Alberta read my mood and rested my head in her lap, as she ran her hand softly through my hair. Schooled by my parents to keep an eye out for retirement and advancing age, I thought to myself, “This woman is strong yet gentle. She would be able to take care of me if need be.”

The moment was prescient. I was soon blindsided by a devastating midlife depression that cost me a tenured and financially rewarding faculty position, and played havoc with my self-esteem. Alberta hung in there through 15 years that was characterized more by doctors’ appointments than fine cuisine and good theater.

I’d been raised in a family where money matters were ceded to men. Although I knew Alberta’s own family was not wealthy, she was susceptible to the life of plenty promised by nearby Hollywood and had an uncle who for a time owned the Indiana Pacers basketball team. She was no stranger to money largesse and had many of the makings of my feared antagonist, the formidable princess.

Alberta hadn’t done anything to cause me to doubt her responsibility with money, and yet I was terrified by the nightmare of ballooning credit card balances and gaudy jewelry. Fearing catastrophe to my supposed birthright as a man in financial control, I incredibly and insensitively presented Alberta with a homemade premarital contract. Alberta would agree to work at least half-time to “qualify” for sharing in our joint income. I proposed this outlandish arrangement even though she was already working full-time as a research associate at the university and was developing a private practice on the side.

Hurt and feeling betrayed, she refused to sign. Although Alberta has demonstrated her devotion to me many times over, she has never fully forgiven my breach of trust. I don’t blame her.

Fast forward two years into our marriage, when I tossed in another grenade, this time not of my own making. I suffered a full-blown anxiety attack while lecturing psychiatry residents on theories of psychotherapy. Drenched in sweat and heart pounding, I needed to be escorted back to my office. Thus began my deep anxiety-driven depression.

Throughout the ordeal, I somehow managed to sustain our stock fund and real estate investments, but barely. Just what was my erstwhile princess up to during my extended inability to perform many of the defined roles of husband and father? Did she find solace in an emotional affair? Maybe a caregiver to free up time for a shopping rampage or two? How about a European voyage with a likewise neglected friend to pump up those credit card balances? No such escapades materialized.

Frankly, what I remember most about our credit card bills are the charges and co-pays for my own treatments that led me down the rabbit hole of purported psychiatric remedies. There were more than 25 anti-depressant and anti-anxiety drug trials, topped off with a suicide attempt induced by an experimental medication. Alberta arranged numerous out-of-town consultations with renowned experts in depressive disorders and accompanied me to all of them. Each raised hope and ended with disappointment. With my hearing now significantly impaired, she acts as an interpreter at my annual physical and my visits to the cardiologist.

Alberta has her Social Security benefits deposited directly into our joint checking account, no questions asked, no grand spending schemes. She continues to find gratification three days a week helping her psychology patients overcome life’s hurdles, while I treat barely a handful. I owe her even for my return to practice. In the throes of the depression, the thought of ever working again seemed overwhelming and incomprehensible. When I announced I would let my psychology license expire and save $400, she insisted I cling to hope.

I handle our investments, including Alberta’s retirement plans, but she has become an invaluable asset in managing our rental properties. As a “people person,” she’s more effective than I am with renters and our new property manager, who may dislike me as much as I dislike him. Here’s where the rubber meets the road: Between her private practice and her share of our dividend and rental income, Alberta is responsible for two-thirds of our income.

Forty years ago, I feared a sense of masculine inadequacy if I lost control over our finances—and almost sabotaged our relationship. Don’t get me wrong. Alberta is no saint. She can hurl epithets and slam doors with the best of them. But she never became the princess I so dreaded. Instead, in an ironic reversal of fortune, she helped me to become more of a prince.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve's earlier articles.

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What It Cost

MY DAD'S FINANCIAL ledgers were key sources of information for my article yesterday about my parents’ retirement journey. In these binders, my father kept track of a wide variety of financial information, all entered in his impeccable handwriting.

I have no doubt Dad would have loved Excel spreadsheets as much as I do, had they been available earlier in his life. When he was in his 80s, he purchased his first personal computer and was able to perform some rudimentary tasks. But by that stage in his life, getting the computer to do what he wanted was often a hassle.

I shared some of the nuggets I gleaned from his ledgers in yesterday's article. Here are other items I found interesting:

Electricity costs. In 1960, the total electricity bill for my parents’ home was $100.62. Using an inflation calculator, that would correspond to $1,038.87 today. In 1985, the electricity bill was $720.41, equal to $2,040.06 in today's dollars. The real cost had almost doubled in 25 years.

Heating costs. My parents’ house was heated using oil. In 1960, the heating bill was $198, or $2,038.21 adjusted for inflation. How about 1985? The heating bill that year was $1,200.56, which would be $3,399.75 today. Yikes. For our similarly sized house, which uses natural gas, annual heating expenses have never reached $900.

Real estate taxes. In 1960, the property taxes on my parents’ home came to $510.35. By 1985, they were $2,488.10. After accounting for inflation, their real estate taxes had increased 34% over 25 years. I expected the increase to be even larger, since rising real estate taxes were given as one reason my parents relocated from Moorestown, New Jersey, to Lancaster, Pennsylvania, in 1987. Still, the 1987 move did bring big savings: The tax bill on their Lancaster home was only about half of what they paid on the Moorestown house.

Phone costs. In 1985, telephone expenses were recorded as $713.87, corresponding to $2,021.54 today. Seeing that makes me feel a little better about the cost of our family’s phone plan, which is in the same ballpark but includes much more functionality and flexibility. And unlike my parents in 1985, we have no need to limit long distance calls to control expenses.

Overall household costs. In 1985, the total annual cost of operating my parents’ household was recorded as $5,559.32. This included real estate taxes, water, sewer, phone, insurance, heating oil and electricity. Note that food and vehicle expenses are not included in that amount. In today’s dollars, that would be $15,742.90. Surprisingly, when I compare that sum to our family’s corresponding expenses last year, the totals are within a few percentage points of each other.

Portfolio diversification. The ledgers contain investment records dating back to the 1950s. Living most of his life in an era before mutual funds became popular, Dad’s investment portfolio consisted of individual stocks and bonds.

I found his portfolio to be astonishingly undiversified, with 75% of his stock holdings concentrated in communications companies such as AT&T, Lucent, Verizon and Bell South. The other 25% included General Motors, Delphi Automotive and a couple of utilities. The idea of purchasing foreign stocks probably never crossed his mind.

Dad’s primary objective for his stock portfolio was probably to increase his day-to-day cash flow. Almost all of his long-term stocks holdings paid a healthy dividend. Portfolio growth was likely only a secondary consideration.

In Dad's day, there was no such thing as buying stock with a click of a mouse. He had to go through—and pay—a broker to make his purchases. I’m sure advice from his broker influenced his portfolio’s composition. Strategies that seem second nature to me, such as portfolio diversification, buying index funds and minimizing fees, simply weren’t in vogue during his era.

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The Downside of Up

SAVINGS YIELDS SOARED in 2023—and all that interest income is now showing up on people’s tax returns.

Forbes published historical average money-market rates based on FDIC data. The average rate in 2020 and 2021 was 0.1%. That jumped to 0.15% in 2022 and 0.59% in 2023. But remember, those are averages, and it isn't difficult to find higher yields. For instance, interest rates on high-yield savings accounts are up sharply since spring 2022.

I looked at the yield on my Capital One online savings account for the past few years. The rate was 0.4% on Jan. 1, 2022, 3.3% on Jan. 1, 2023, and 4.35% on Jan. 1, 2024. Let’s assume you had $10,000 in a Capital One savings account on Jan. 1, 2022. By the end of the year, it would have grown to $10,138, an increase of $138. If you didn’t touch it, during 2023 it would have continued to grow to $10,544, up another $406. The interest earned in 2023 was almost three times as much as in 2022.

Savings account interest—assuming the money isn’t held within a retirement account—counts as taxable income on your federal return, and also in most states. In the initial weeks of tax season, I’ve prepared returns for several clients who have seen significant increases in their interest income. One client went from about $6,000 to $24,000. Another went from $2,000 to $17,000.

Both were quite surprised by the increase—and by the tax implications. These two clients were in the 22% marginal tax bracket. Each additional $1,000 of interest meant an additional $220 of federal tax owed.

In both cases, the clients were also collecting Social Security benefits. They received an 8.7% increase in 2023. But there have been no changes in the limits on how much income you can collect before benefits become taxable. The combination of increased Social Security benefits and increased interest income meant more of their Social Security was taxable. This also led to significantly increased tax bills. One client owed about $6,000.

But that wasn’t the only shock. Our income tax system is a pay-as-you-earn system. The IRS expects us to remit income taxes throughout the year as we receive our income. For most workers, employers withhold taxes. Meanwhile, self-employed taxpayers are required to pay quarterly estimated taxes. Retirees may also have to make quarterly estimated tax payments if they don’t withhold enough during the year.

If you don’t pay enough taxes during the year, either through withholding or estimated payments, you could be liable for a penalty. And even if you made estimated payments but were late doing so, you could find yourself in the strange situation of paying a penalty even though you’re due a refund when you file your tax return.

How do you figure out whether and when to file estimated taxes? The IRS recommends you file estimated taxes if you expect to owe more than $1,000 when you file your return. The IRS has a useful tax withholding estimator.

Consider a simple scenario based on one of my clients. Mary is age 66 and retired. This will be her situation in 2024:

Mary’s pension will be $48,000, with 10% withheld for federal taxes.
Mary’s Social Security will be $24,000, with no taxes withheld.
Her expected interest earnings are $6,000.

In this scenario, Mary would owe $2,986 in federal taxes when she files her return, on top of the taxes already withheld. What if her interest income ballooned to $24,000? The federal taxes she owed would also balloon, to $6,946. Both amounts could lead to a penalty. How could Mary avoid a penalty? The IRS provides the following guidance:

Withhold enough—or make big enough estimated payments—through the year so you owe less than $1,000 on your return.
Through estimated payments and withholding, pay at least 90% of the tax shown on the return for the current tax year or 100% of the tax shown on the return for the prior year, whichever amount is less. For high-income earners, that 100% becomes 110%.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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