Category: Personal Finance

Review Your Credit Profile

Picture Credit: Daniil Vin || As a condtion of using the picture, his firm is CreditDebit Pro. This is NOT an endorsement of his services; it is a “thank you” for use of the image.

Before I start this evening, I want to mention three old articles that I have written on personal credit issues. Now some of my articles on having enough cash on hand would also apply, but the following three articles meet the topic the best:

The last article is a little “out there” but the range of things that credit scoring can affect is huge. For a humorous over the top take on such a system that has gone out of control, consider the Webtoon LUFF, which just recently completed.

As I said earlier regarding the many ways credit scores get used:

The same is true for many other uses of credit data. Different parties want different aspects of the underlying data. Whether it is employers, lessors, lenders, insurers, etc., in an impersonal world, where there are fewer shared ethical values than in the past, economic actors rely on semi-public data to get comfortable about who they are dealing with.

On Credit Scores

All manner of decisions are based off of your credit score and related scores. They can affect:

  • Loan decisions
  • Insurance coverages (Auto, Home, Umbrella, Small Business coverages, and maybe even Life)
  • Rental and Leasing
  • Employment
  • And, at the outer edge, relationships.

Credit scoring is a subset of algorithmic scoring that is going on with greater frequency in our anonymous world today. To escape some of that, you can try setting up a relationship with a local community bank, smaller insurance companies, etc. They will treat you as more of a person, and less of a number. That said, it will likely cost more on average. Your mileage may vary.

What to do?

I decided to write this because I went through my own credit profile at one of the credit bureaus, and decided to try to correct some information that looked wrong. Now my credit score is fine, but what I was doing was in the nature of locking a door to your house where that door is never used.

I called up credit card companies to close credit cards that had not been used in years, a few of which I thought had been closed, but the credit report did not reflect that. Also one where it said there had been a dispute over the account. Oddly, that one was the easiest to deal with. They have now closed the account.

Now there are many sources of getting credit data on yourself. This is a non-exhaustive list:

  • Credit monitoring from data breaches. I usually get enough of these that I rarely don’t have this credit data.
  • Through third parties doing you a service as a part of a broader offering to ad some value. My example here is AAA, where they have thrown in credit monitoring as a service.
  • From credit card companies themselves. My longest-dated credit card is from JPMorgan Chase, and they give me credit monitoring as well, and free access to my credit score. (Note: it is just one credit score. There are many of them and they are not identical, but typically they are highly similar.)
  • Finally, available to EVERYONE — AnnualCreditReport.com.

Complete data, totally free, excluding credit scores, is available at AnnualCreditReport.com. You can get all three credit bureaus at once, or, you could do a different one every four months in order to keep a closer eye on your credit profile. They all have roughly the same data anyway — I have never seen a significant difference on my profile between the three. But then, I have no loans and few credit cards outstanding. I have deliberately kept things simple over my lifetime.

Look at your credit data for things that are wrong. Talk to the lenders to correct things, and if that doesn’t work, file statements with the credit bureaus to tell your side of the story. Close unused accounts, with the exception of your longest-standing account, which plays a role in your credit score. Credit scores give you more points for the length of your longest open credit account.

Practically, I keep two personal credit cards. One is the card offering the best deals to me in terms of money back, and the other is the backup card, which is the one that I have had the longest. I keep two cards because of the possibility of fraud on one of the cards. When fraud happens, a card gets cancelled and reissued. During that time where you wait for the reissue, a backup card is a big help; the convenience of using a card for deferred payment is considerable if you pay off the bill in full each month.

I review credit card charges once a month to check for fraud. I have a monthly “finances day” for my home and business, where I check my finances, and manage future cash flow. I review the overall credit profile two or three times a year. Most of the time it yields nothing, but it only takes five minutes unless something needs to be corrected.

As I often say here: you are your own best defender. But if you feel that you are in over your head, find a smart friend who is local to you and ask him for help.

Finally, keep enough liquid assets around to deal with moderate disasters. Build a buffer against common troubles. If you do these things, and have insurance against most common risks, you will survive better than most, and absolutely survive 99% of the time.

Don’t Lose Your Head

Photo credit: David Seibolid || Oh dear, you lost your head!

So we had a hard market day yesterday. Maybe COVID-19 will resurge in the USA. The great thing about the USA is that no one is ever truly in charge. Power is shared. Most of the time, that’s a good thing.

I am not saying that it is time to buy, unless it is small trades. I bought 0.7% of stocks yesterday as the market fell 5%+. My aggregate cash position is around 20% of assets. After buying as the market fell in March, I was selling off stocks in May.

Did I not believe the rally? Sure I did, but there are degrees of belief, and I kept selling bits as the market rose.

Now let me tell you about two former clients. One was retiring, and wanted to move his assets to a firm I had never heard of. He notified me the second day after the bull market peak in February. I did not argue; I just liquidated the account for him. As the market fell after that, he told me to delay selling — the market would come back. I told him he had already sold.

Now, the new manager was incompetent in rolling over the assets. I was astounded how long it took, even with me helping them. As such, the client got a bad idea, and took 2/3rds of the assets and bought an equity indexed annuity decently past the recent market bottom. The insurance company knew how to roll assets. I wish my client had asked me regarding this — EIAs are “roach motels” for cash. They don’t return well, and you can’t get out of them. Your money dies there.

The incompetent asset manager ended up managing 1/3rd of the cash they thought they would. My former client is ill-served both ways.

Then there was the second client. He seemed to be happy and was interested in good long-run returns. In my risk survey, he scored normally. But when the market fell hard in March, he panicked and wanted to liquidate. But he asked my opinion on the matter. I told him that quick moves of the market tend to reverse, and that the securities that he held were well-capitalized, and even if the market fell further, they would not fall as much.

Then he told me that he never wanted the portfolio to fall below a certain level which we were at that point close to breaching. This was new information to me, and I said to him, if that’s the case, you should not be investing in stocks. Either change your goal, or change your asset allocation.

For a day, he realized he should be willing to take more risk. Than the market fell hard again, and he told me to liquidate.

I did so.

And it was the bottom.

So what is the lesson here?

It’s simple. Choose an asset allocation that you can live with under all conditions, and stick with it. This is the same thing that I tell the risk-averse pastors that I serve on the denominational pension board. And if you are not sure that you can live with it, move the risk level down another notch.

A second lesson is be honest with yourself, and also with your advisor, about your risk preferences. Most advisors that I know are happy to adjust the riskiness of client portfolios. There is no heroism in taking too much risk.

As I have said a number of times before, I have run my portfolio at 70/30 risky/safe all of my life plus or minus 10%. I personally could run at a higher level of risk, but I would rather not take the mental toll of doing so.

And when the market moves, I trade against it — but not aggressively. I am always moving in the right direction, but slowly, because I am never 100% certain where mean-reversion will kick in.

Yesterday was tough. Big deal. Days like that will happen. It’s part of the game. As for my second client, he took more risk than he was comfortable with, and ended up leaving the game, which is the worst outcome under normal conditions.

Sun Tzu said the most important task of a general was to understand himself and his enemy. My second client did not understand his own desires, and he did not understand how volatile the market can be.

As such he lost out — as did the first client in other ways. And thus to all I say, “Choose an asset allocation you can live with under all conditions, and stick with it.” You will be happier, and you will do better if you do so.

Ways to Love with Money

Photo Credit: -Curly- || Really, it’s easy to be happy when you have just enough. All the money you need and not enough to fight over 🙂

Two things I request of You (Deprive me not before I die): Remove falsehood and lies far from me; Give me neither poverty nor riches? Feed me with the food allotted to me; Lest I be full and deny You, And say, “Who is the LORD?” Or lest I be poor and steal, And profane the name of my God.

New King James Version — Proverbs 30:7-9

Most of us want to be loved. It’s a deep need, and people crave it, often seeking good and bad ways to satisfy the need.

I counsel some people regarding their lives, who are not well off. It is not a rewarding pursuit in a pecuniary sense, but I do it out of love for them. Many have failed marriages. Some have marriages in danger of failing. Most have some habitual problem that is keeping them from succeeding. They sabotage themselves because they don’t want to admit that they are the main cause of their problems.

(This is not what intended to write about when I started.) Those who don’t have deep problems in their relationships still need to “weed and feed” in order to keep their relationships healthy. Weed — apologize when needed. Feed — show love regularly.

Love takes time, so the song by Orleans goes. I spend a minimum of 15 minutes every night with my wife talking to her, hearing her needs, doing the business of our marriage. The closer the relationship, the more tending it needs.

Spending time definitely affects love. What about money? How does it affect love? I will give a few ways that money can aid love.

  • Work hard to support those that you love.
  • Save money so that unexpected troubles don’t knock you off your feet.
  • Help your friends in their times of need.
  • Help your children go to college, or help fund their initial business efforts.
  • Buy a home that will allow you to take care of your family. Pay off the mortgage so that it is no longer a burden.
  • Buy a life insurance policy so that your loved ones are supported after your demise.
  • Give money to your favorite charity.
  • Take breaks from your work to spend time with your family. It can be a vacation, if that is what you like.
  • Analyze what risks your family faces, and find ways to neutralize them.
  • Invest wisely, so that you have more to help others, and enjoy your life.
  • Give gifts to your spouse and children such that they get something that they desire.
  • And more… give ideas in the comments.

Sergio Mendez had a song called “Put a Little Love Away.” Part of the lyrics were:

Better put a little love away
Everybody needs a penny for a rainy day
Put a little love away
Keep a loving thought in mind
Someone’s gotta leave
Somebody’s gotta stay behind
Put a little love away

Universal, Inc.

For those of us who take care of others, rather than just living for ourselves, showing love is important. But it requires a complex balancing act of labor, saving, investing and giving.

In this sense, the money is distilled effort used to aid others. I have often said that love is giving others what they desire. Find ways to give those you love what they desire, whether it requires time, money, or whatever. Be a giver, and you will likely be happy.

Praise for The Moneyist

Picture Credit: Marketwatch.com || Quentin Fottrell takes your questions and answers them… we sometimes do that at Aleph Blog

I sometimes read Quentin Fottrell as he answers tough reader questions at The Moneyist, a column at Marketwatch.com. In general, I agree with what he advises 90% of the time, and think he does it in an entertaining way.

I say this as one that generally doesn’t like advice columnists. Sometimes I think they do more harm than good.

As I read some of the questions and answers in his column, I note several patterns.

  • Remarriage (after divorce or death of a spouse)
  • Divorce even without remarriage
  • Bad Communications, often intentional
  • Greed
  • Laziness
  • Various and sundry “Miss Manners” -type questions that are related to money

I want to give my own take on these issues.

Let’s start with the simplest of these — bad communications. The person with the assets doesn’t want to hurt the feelings of others, so he doesn’t reveal the full truth of what he is planning to do with them, stringing everyone along until he dies. The explosion happens after his death, when everyone fights over what they thought was theirs.

Bad communications on money can spoil many marriages. It is better to have frank conversations about money with your wife or husband than to leave them in the dark. Marriage is a joint venture — communications have to be frequent and loving if you want to succeed.

Then there are second marriages. After death of a spouse, it is simpler. Take a simple approach — yours, mine, and ours. Children from prior marriages can take a fixed share of the past prosperity immediately or in trust, or opt into the shared prosperity of the new family.

With divorce, it is harder, because the ex-spouse still lives and can advocate for his interests.

Laziness and greed are relatively simple issues. Limit your dealings with them to the minimum, and as much as possible, let the consequences for their behavior fall on them. Don’t bail them out until they genuinely want to change.

Finally, the heart of manners is treating others the way you would like to be treated.

  • Learn to forgive
  • Avoid greed of your own.
  • Realize that good family and friends are worth more than money
  • Don’t sponge off of others.
  • Be honest and courageous. A little pain now in being honest with someone that you are offending will save others a ton of pain later.
  • Above all, look out for the best interests of others. In a limited sense, that is what it means to love.

Anyway, kudos to Quentin Fottrell — keep answering the hard questions. Where I get opportunity, I will answer similar questions.

The Sirens’ Call

Photo Credit: Miles Nicholls || Actually, the bells get rung at the top, and quite frequently for the duration of the process. People hear it and they decide not to listen. Too many false alarms.

The stock market model is projecting a 3.06%/year return over the next ten years as of the close on 11/15/2019. That’s near where a 10-year mid-single-A rated bond would trade. That’s not offering a lot of compensation for putting your money at risk.

I’m planning on reducing my total risk level by 15% or so, moving my equity allocation from around 70% to 55%. That will be the lowest it has been in two decades. I’m not running to do this. I am still working out the details.

The Fundamentals of Equity Market Tops

You might recall an old piece of mine that I wrote for RealMoney back in January 2004 — The Fundamentals of Market Tops. In it, I gave a non-technical analysis approach to analyzing whether we might be near a market top. In 2004, I concluded that we were NOT near a market top. (This article also served as a partial template for the article at RealMoney in May 2005, which said that YES we were near a market top for Residential Real Estate. Two good calls.)

The article is longer than most, should not fit in the TL;DR bucket for most investors. I’m not going to reconstruct the article here, but just give some brief points that fit the frame of the article. Here I go:

  • Value investors have been sidelined. Growth is winning handily.
  • Valuation-sensitive investors are raising cash. Buffett sitting on $130 billion is quite statement. He’s not alone. More on that below.
  • Momentum is working.
  • There has been a decline in IPO quality.
  • Lots of money is getting attracted to private equity.
  • Corporate leverage is high, and covenants are weak.
  • Non-GAAP accounting gets more attention than it deserves.
  • Defined benefit plans are net sellers of stock, but not for the reasons I posit in my article — they are doing it to move to private equity and alternatives, and bonds as a part of liability-driven investing.

Cutting against my thesis:

  • More companies are committing to paying dividends, and growing them. I’m impressed with the degree that corporations are thinking through their use of free cash flow, even as they lever up.
  • Actual volatility isn’t that high.
  • The Fed is supportive.

On net, these conditions give some confirmation to what my quantitative model is saying… the market is near a top. Could it go higher still? You bet, with an emphasis on the word “bet.” The S&P 500 at 4500 would be where valuations were during the dot-com bubble.

Asset-Liability Management and Market Tops

I want to emphasize one point, and then I am done. I wrote another article called Look to the Liabilities to Understand the Assets. There are a few more like it at this blog.

The main idea as applied to the present is this: when you have “strong hands” (those with long time horizons and strong balance sheets) raising cash levels and those with “weak hands” (those with shorter time horizons and weaker balance sheets) staying highly invested in risk assets, it is a situation that is unstable. Those that have capability to “buy and hold” are sitting on their hands, whereas those who have to get returns or they will suffer (typically municipal defined benefit plans and older retail investor who didn’t save enough) are risking a great deal, and have little additional buying power.

This is unstable. This situation typically exists at market tops. Remember, it is what investors DO that is the consensus, not what they SAY.

With that, consider your risk positions, and if you think you should act, do so. If you are uncertain, you could ask an intelligent friend or do half.

Neither a Borrower nor a Lender be

Photo Credit: Ben Schumin || Looks like a place where you may get a fast deal, but not the best deal.

Remember 125% LTV loans on houses prior to the financial crisis? Well, auto loans now are their twin separated at birth. The Wall Street Journal wrote an article recently about those who lend more than 100% on automobiles.

Now, in the old days, auto loans were short. They were shorter than five years, and never more than 80% of the value of the car. This meant that the balance of auto loan would always be less than the depreciated value of the car under ordinary circumstances.

But as has been common in American history, we always test the limits in lending. Maturities have been lengthened and loan-to-value ratios expanded. If you need a car, and your current loan is more than the value of the car you want to trade in, some lender will be willing to roll the loss into the value of the loan to purchase the next car, with a higher interest rate to compensate for the added risk.

Why is the risk higher? Auto loans are collateralized by the car. If you don’t pay, the repo man comes and takes the car. If the car is worth less than the loan, the borrower is liable for the difference. When the difference is big, the lender will pursue the borrower for payment, and either get the payment, or send the borrower into bankruptcy. The costs of bankruptcy to the borrower means losing the car and not being able to borrow for seven years or so.

But there will be costs to the lender as well. In a financial crisis, most of them will go bankrupt themselves. They aren’t thickly capitalized, and can’t afford a lot of losses. That’s part of the price of making low quality loans.

What to do

The first step in doing well here is to buy a cheap car that is of reasonable quality, even if it isn’t fashionable. I have only once paid more than $11,000 for a car, and that was for a 15-seat Ford XLT Van that last 14 years for me. Typically these days, I buy refurbished cars that have been through a wreck, and carry a salvage title. I would say, “You don’t need to look good,” but I look just fine. I pay very little for cars, and they last well.

Part of the challenge is finding honest auto dealers who charge a reasonable markup over their costs. Ask your smart friends for advice. (If you don’t have smart friends, get some.) Part of the price of the method that I use is that few lenders will lend on “salvage title” vehicles, so I have to pay cash. It is better to borrow unsecured at a high rate and buy a cheap but quality salvage title car than to buy an expensive vehicle from a regular dealer.

There is a hidden cost to buying salvage title cars though. If there is an accident and it is totaled, the insurer will pay you far less than for a similar non-salvage title vehicle.

Don’t Borrow to Buy a Car

This is the simplest advice. When I was 27, my parents came to visit me in California. My Father looked at the two used cars that my wife and I owned, and praised me — “You haven’t bought a lot of fancy rolling stock.”

I have never taken out an auto loan. I never will. Borrowing should only be for things that don’t depreciate, like a house.

People need to get over the idea that their car has to be powerful or pretty, and focus on buying cars that are reliable. Paying less for a car is one of the easiest ways to save money, so long as you get a quality car.

Avoid Owning Shares in Auto Lenders

I don’t know who you have to avoid here. I can’t think of a pure play. If you know of one, please mention it in the comments. I simply know that those who lend without adequate security eventually get hosed.

You would think we would have learned from the Financial Crisis, but the more I look at current conditions, the more I think we are short-sighted.

We are not facing a banking crisis now, but maybe we might around 2030. The banks are mostly in good shape now, but perhaps we might see the failure of some non-bank lenders in the next recession who have lent too much on autos.

In summary, try to avoid borrowing on a car, and don’t own companies who lend more than 100% on a car.

PS — three articles that I have written on buying cars:

We Eat Dollar Weighted Returns ? III (Update)

Photo Credit: Sitoo || No, you can’t eat money. But without money farmers would have a hard time buying what they need to grow crops, and we would have a hard time bartering to buy the crops

Data obtained from filings at SEC EDGAR

Tonight I am going to talk about one of the most underrated concepts in finance — the difference between dollar-weighted and time-weighted returns, and why it matters.

So far on this topic, I have done at least seven articles in this series, and you can find them here. The particular article that I am updating is number 3, which deals with the granddaddy of all ETFs, the SPDR S&P 500 ETF (SPY), which has been around now for almost 27 years. It is the largest ETF in the world, as far as I know.

From the end of January 1993 to the end of March 2019, SPY returned 9.42%/year on a time-weighted or total return basis. What that means is that if you had bought at the beginning and held until the end, you would have received an annualized return of 9.42%. Pretty good I say, and that is an advertisement for buy and hold investing. It is usually one of the top investing strategies, and anyone can do it if they can control their emotions.

Over the same period, SPY returned 7.29%/year on a dollar-weighted basis. What this means is if you took every dollar invested in the fund and calculated what it earned over the timespan being analyzed, they would have received an annualized return of 7.29%.

That’s an annualized difference of 2.13%/year over a 26+ year period. That is a serious difference. Why? Where does the difference come from? It comes partially from greed, but mostly from panic. More shares of SPY get created near market peaks when everyone is bullish, and fewer get created, or more get liquidated near market bottoms. Many investors buy high and sell low — that is where the difference comes from. This also is an advertisement for buy and hold investing, albeit a negative one — “Don’t Let This Happen To You.”

Comparison with the 2012 Article

Now, I know few people actually look at the old articles when I link to them. But for the sharp readers who do, they might ask, “Hey, wait a minute. In the old article, the difference was much larger. Time-weighted was 7.09%/year and dollar-weighted was 0.01%/year. Why did the difference shrink?” Good question.

The differences between time- and dollar-weighted returns stems mostly from behavior at turning points. As I have pointed out in prior articles, typically the size of the difference varies with the overall volatility of the fund. People get greedy and panic more with high-volatility investments, and not with low-volatility investments.

That said, most of the effects of the difference are created at the turning points. During the midst of a big move up or down, the amount of difference between dollar- and time-weight returns is relatively small. The big differences get created near the top (buying) and the bottom (selling).

So, since the article in 2012, the fund has grown from $80 billion to over $260 billion at the end of March 2019. There have been no major pullbacks in that time — it has been a continuous bull market. We will get to see greater divergence after the next bear market starts.

Be Careful what you Read about Dollar-Weighted Returns

I’m not naming names, but there are many out there, even among academics that are doing dollar-weighted returns wrong. They think that differences as cited in my articles are too large and wrong.

The idea behind dollar-weighted return is to run an Internal Rate of Return calculation. To do that you have to have a list of the inflows and outflows by date, together with the market value of the fund at the end as an outflow, and calculate the single rate that discounts the net present value of all the flows to zero. That rate is the dollar-weighted return, and you can use the XIRR function is Excel to help you calculate it. (Note that my calculations use a mid-period assumption for when the cash flows.)

The error I have seen is that they try to make the dollar-weighted calculation like that of the time-weighted, creating period by period values. Now, there is a way to do that, and you can see that in the appendix below. As far as I can tell, they are not doing what I will write in the Appendix. Instead, they treat each year like its own separate investing period and calculate the IRR of that year only, and then daisy-chain them like annual returns for a time-weighted calculation.

Now, the time-weighted calculation does not care at all about investor-driven cash flows, like purchases and sales of fund shares, aside from dividend payments and things like that. It does not care about the size of the fund. It just wants to calculate what return a buy and hold investor gets. [Just remember the rule that an NAV must be calculated any time there is a cash flow of any sort, otherwise some inequity takes place.]

The dollar-weighted calculation cares about all investor cash flows, and ultimately about the size of the fund at the end of the calculation. It doesn’t care about when the returns are earned, but only when the cash flows in and out of the investment.

The odd hybrid method is neither fish nor fowl. Time-weighted corresponds to buy and hold, and dollar-weighted to the returns generated by each dollar in the fund. The hybrid says something like this: “We will calculate the IRR each year, but then normalize the fund size each year to the same starting level so that the fund flows at tops and bottoms do not compound. Then we show them year-by-year so that the returns are comparable to the total returns for each year.

As H. L. Mencken said:

Explanations exist; they have existed for all time;?there is always a well-known solution to every human problem?neat, plausible, and wrong.

Source: Quote Investigator citing Mencken’s book “Prejudices: Second Series”

In an effort to make a simple annual comparison between the two, they eradicate most of the effects of selling low and buying high. More in the Appendix.

Summary

Be aware of the difference between dollar-weighted and time-weighted returns. If you have a strong control on your emotions, this is not as important. If you tend to panic, this is very important. It is more important if you buy highly volatile investments, and less so if you size your volatility to your ability to bear it.

To fund managers I would say this: if you are tired of all of the inflows and outflows, and are tired of getting whipsawed by your clients, maybe you should take a step back and lower the overall risks you are taking. This will benefit both you and your clients.

Appendix

Here’s how to run an annual calculation of dollar weighted returns that be correct. For purposes of simplicity, I will assume a simple annual calculation that has multiple cash flows inside it. (If we are working with a US-based mutual fund, there would be reporting of change in net assets every six months.)

Calculate the first year (dw1) the way the hybrid method does. No difference yet. Then for the second year, run the IRR calculation for the full two-year period (IRR2). Then the second year only dollar-weighted return (dw2) would be:

((1+ IRR2) ^2) / (1+dw1) -1 = dw2

and for each successive period it would be:

(1+IRR[n])^n(1+IRR[n-1])^(n-1) – 1 = dw[n]

That is more complex than what they do, but it would preserve the truths that each entail. It would make the values for the yearly dollar-weighted returns look odd, but hey, you can’t have everything, and the truth sometimes hurts.

Full disclosure: a few of my clients are short SPY as part of a hedged strategy.

How Much Should I Spend?

Photo Credit: 401(K) 2012 || As that great moral philosopher George Harrison once sang: “It’s gonna take a lotta money, a whole lot of spending money…”

Here is a comment from a reader on my last post:

Hello David. Fellow actuary here. I usually love your posts. I disagree with this one. Or at least I disagree with the title. ?How much (or how little) should I spend?? may have matched the content better.
I?d love to read your thoughts on ?When have I saved enough so that I may now outspend my income?? Perhaps you have written such a post but I don?t recall it.

Thanks for your great content!

https://alephblog.com/2019/10/16/how-much-should-i-save/#comment-37283

Yeah, I get it. Here are four posts that describe my view on spending money:

My main idea is encouraging spending that supports the well-being of the household in the long-run. I am trying to encourage a balanced point of view, which is the hardest thing to do. For many people it is easier to convince them to do just one simple thing than try to balance two or more unaligned goals.

That is why the “stoplight rule” is so useful. It is minimal, but balances saving and spending. Imagine telling a friend to enjoy life, but not too much, such that he compromises the future. The stoplight rule is a real help.

People have a hard time expanding their time horizons. It is easiest to live for the present, and hardest to live for retirement. The good of the present is tangible, whereas the good of the future is intangible.

I do not favor excessive savings. It usually leads to a trail of tears in relationships. God wants life to be enjoyed, because it honors the way he provides for us. God is not a miser; we should not be misers either.

As I said in the post Don?t be a Miser in Retirement (Or Ever):

The author of?the?book that I most recently reviewed, Carlos Sera,?gave one of his sayings on page 97 of his book:


?There is a fine line between over-saving and under-living.?

That particular story dealt with a couple that had been especially frugal, and after not earning all that much, at retirement had $6 million. ?They had a traditional marriage, and the husband handled the money entirely. ?He worked until 72, retired due to incapacity, and on the day of his retirement, he handed his wife a check for $3 million.

She thought it was a joke, so for fun she tried to cash the check. ?To her surprise, the check cleared. ?Then came the bigger surprise ? her amazement gave way to anger! ?All the years of self-denial, and they were this well-off! ?There were so many things she denied herself along the way, and now both of them were too old to truly enjoy their riches.
There?s more to the story? the point the author goes for is mostly abut how husbands and wives should learn to cooperate on the shared tasks of household economic management, so that both are on the same page, and they can be agreed on goals and methods.

I agree with that, and would add that the best approach on spending versus saving is what I would call a conservative version of the ?middle way.? ?Make sure that you are provident, but balance that with contentment and a happy enjoyment of what you have. ?Life is meant to be lived.

Yes, it is good to be prudent and frugal, but not to the point where you amass a lot of assets and never enjoy them.

https://alephblog.com/2015/11/03/dont-be-a-miser-in-retirement-or-ever/

I sometimes say in certain charitable contributions “What is the point of money if I can’t enjoy it being spent to a good purpose?”

Yes. There are some tiny-minded people who believe that “the one with the most toys at death wins.” These are people who want to delude themselves that selfishness is what is right, which is ridiculous.

If you are well off, God does not want you to be a miser. First, he wants you to honor Him. After that, he wants you to take care of your charitable obligations to society. After that, he wants you to enjoy what you have.

And that’s what I do, Lord helping me. I am sparing on optional items, but I take care of my home, the church, and other opportunities for charity that are in front of me. After that I relax, because I wait for other needs to be big enough to deal with.

How Much Should I Save?

Photo Credit: Images Money || Saving is a good thing, don’t let the Keynesians tell you otherwise. After all, Keynes saved and invested.

When I started Aleph Blog my oldest child (out of eight) was 17. At present, my youngest child is 17. My view on saving is that you should save as much as you can. Why?

Much consumer spending is not needed. It is done to compete with other people for bragging rights, rather than meet basic needs. Many people in the US and other places are spoiled, and think that they need to have the best in the goods that they consume.

Learn from your great-grandparents who you never met, or were too little to understand: Deferred gratification. Don’t maximize the joy of your youth. Rather, save when you are young, and look to have a happy life from middle age to the end of life. That would be more happiness than if you had not saved when you were young.

What I have seen from my own children is that the savers are he happy ones, and the spenders are miserable… chased by the debt collectors and the repo men. It is a poor kind of happiness for me that those who listened to me are doing well, and those who ignored me are doing bad.

My basic advice for you is this: save 10% or more of your income. If you think you can’t do it, you are right. But I will tell you that you can do it, regardless of what your think. It is a question of will, not ability.

True saving means cutting expenses that are pleasant but not necessary. It means searching over your credit card statement for things you agreed to once, but no longer need. It means living with the old clothes that are just fine, but a little out of date. It means eating common food at home, and learning how to cook delicious food yourself. In this era of the internet, with rated recipes, this is not hard.

The main thing to fight is the attitude that you need to spend now. Think and plan. What is the best way that you can organize your life for the next 30 years? When you think long-term everything becomes more rational.

Summary

Save and invest. Your life will be happier if you deny yourself when you are younger, and enjoy life more when you are older. I have been debt-free for over 15 years now. Not having to make a mortgage or rent payment is a sweet thing. Having a valuable asset like my home (free and clear) is a sweet thing.

On average, in my life I saved more than 10% of my income, and I gave away more than 10% of my income. I do not regret the deprivation. At present, I have more than I need, and I give to charities.

I am not telling you to be like me. I am telling you that there is an alternative to the typical consumer mindset. Like your great-grandparents, defer gratification and save. You will be happier in the long run.

The Asymptote of Joy and Woe

Picture Credit: David Merkel / Aleph Blog || I call the middle of the graph “the slope of hope,” but really, it depends what side of the graph you are on…

This is one of my basic pieces on personal finance. The shape of the graph is illustrative, and the units don’t mean anything. It’s meant to motivate a simple concept that everyone should maintain at least a minimum savings buffer.

It is as Solomon said in Ecclesiastes 9:11:

I returned?and saw under the sun that?
The race?is?not to the swift,
Nor the battle to the strong,
Nor bread to the wise,
Nor riches to men of understanding,
Nor favor to men of skill;
But time and?chance happen to them all.

https://www.biblegateway.com/passage/?search=Ecclesiastes+9%3A11&version=NKJV

Accidents happen, both bad and good. We also will grow old, and get weaker. We may meet untimely deaths. Alternatively, we may live a comparatively long period of time, and find we didn’t lay enough aside for our old age.

Even the best of us may not plan well enough for the contingencies of life. That said, there is adequate preparation for most emergencies. First comes a buffer fund of 3-6 months expenses. Second comes basic insurance coverage: health, property and liability. Third comes insurance coverages for others that need your support: life and perhaps disability insurance. Fourth and last is planning for long term goals like retirement and perhaps some help for kids going to college.

This article is meant to deal with the first of those preparations — the buffer fund. It is meant to show how difficult life can be when you don’t have it, and how not having it likely means you may never have it. On the other hand, if you have the minimum buffer fund you may find that bit-by-bit, you get better off.

There are two reasons for this: first, both saving and not saving are usually habitual. This correlates partly with income, but more with your degree of future orientation. I’ve known managing directors on Wall Street that were living paycheck to paycheck. I’ve also known immigrants that earn little, but save half of it. Are you willing to sacrifice some of the present to gain a better future? Are you willing to consume the future through borrowing for expenses in order to have a temporarily better time in the present?

This is one reason why people with the buffer fund tend to keep going upward — they keep saving and investing. And, many without a buffer fund always find themselves in debt. Stuck in debt.

Then there is the second reason: accidents. Those with the buffer fund can handle most bad accidents, and can take advantage of most good accidents. We can call the good accidents “opportunities.”

When the person with the buffer fund faces a bad accident, it is typically a “speed bump.” Nothing notable happens to family life. If no bad accidents happen, he may find that he possess valuable options for the use of excess cash:

1) Pay your insurance premiums in annual installments?
2) Buy your next car without financing it?
3) Pay off your credit card bills in full each month?
4) Ask for a discount for cash when buying big ticket items?? (You?d be surprised.? I drove quite a deal with my orthodontist for my wife and eight kids. I?m the only one that hasn?t had braces.)
5) End the escrow account on your mortgage?
6) Pay tuition bills in full, rather than a payment plan?
7) Take advantage of financial crises, and extend credit at tough times?? (I am still receiving 13% from a business associate that I lent money to in March of 2009, with warrants.)
8 ) Retain cash in your corporation to reduce financing costs?
9) Not worry about the minor disaster that recently hit?
10) Raise your deductibles on your Auto, Home and Health insurance premiums to save money?
11) Receive discounts on services that you want to receive, by getting a discount for buying years ahead?
12) Fund your 401(k), IRA, HSA, whatever, to the fullest?
13 And more?

http://alephblog.com/2011/09/01/build-the-buffer/

When others are offering great deals in the rare times where they need fast cash, the man with the buffer fund (and more) can take advantage of the situation and become even better off.

He can also take advantage of the flexibility that has has to start a business, or, work for a startup that he thinks is particularly promising.

For those without a buffer, at best it can be treading water. But an accident can force someone underwater. Most of the avenues for borrowing with those not having assets who are borrowing to meet expenses are expensive in terms of the rate paid, and onerous in terms of the terms demanded.

Once enslaved to onerous debts, it becomes very difficult to get out of the slimy pit. Note also that credit scores affect all manner of economic affairs, and can affect insurance pricing (wealthier people are better risks on average), job applications, rental opportunities, and much, much more… consider this a minor third reason why my graph above applies. Penalties from banks and credit card companies are stiff, and further entrench debts.

And to those that are really bad off, driving uninsured, not keeping up with payments to the motor vehicles department of your state, not paying on auto debts can find their car repossessed, with the possible loss of employment if he can’t get there. At worst the person can lose the ability to rent and be out on the street. These thing don’t happen overnight, but I have seen them happen piece by piece. It is desperately difficult to reboot a life once you no longer have a place to live. Predators hire people like that, and find ways to cheat them. Those with no assets and many debts have no means of defense. In some cases friends and family may help, but even they cut their losses when things seem hopeless.

This is pretty glum stuff. Aleph Blog is first realistic, and second optimistic. Bad things like these happen, and the people who hit the bottom are typically not only poor money-wise, they are poor relationally as well. Typically they have offended most family members and friends on the way down, and are simply surviving in shelters and tent cities, maybe working, maybe begging, maybe stealing. It’s tough, and for those that work with them, it is exceedingly tough to rebuild the habits and conditions that modestly successful people have.

Closing

So is this just “The rich get richer, and the poor get poorer?” No, it is only partly that. For those that are starting out, make it you goal to be a saver and have a buffer fund of at least three months expenses. For those that are in debt and trouble, fight as if your back is against the wall, and pay off the debts. As you succeed, maybe some friends and family will see the change in your life and help you. For those that are working, but hopelessly behind on debt, declare bankruptcy with the firm determination that you will find a way to make it different in the next phase of your life.

Those at the very bottom need personal help to reboot their lives. Government programs won’t do it. Some churches and focused charities succeed slightly at it. It all depends on whether habits will change or not, and that is the toughest nut of all, humanly speaking. I have seen it happen. I have seen it fail. It comes down to the willingness to sacrifice to create a better life later, which is where this article began. Will you give up some of the present to get a better future? That is where the rubber meets the road.

PS — David X. Martin’s book Risk and the Smart Investor is an engaging way to deal with this topic for those that are better off.

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