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The best predictor of our future behavior is our past behavior. Did you panic during 2008-09’s market crash? You have seen the future.

College or Not?

SEVERAL MILLION households every year deal with a crucial decision involving their teenage children. Will their kids head to college, enter the labor force, join the military or perhaps do something different entirely? Often, this involves weighing the costs and benefits of a college education vs. the immediate income from getting a job.
About two-thirds of high school graduates end up being college freshmen. The remaining third defer or never go to college, but they can still end up earning above-average incomes.

Read more »

Other People’s Stuff

WE’VE ALL GOT stuff. Too much stuff. George Carlin was among the first to highlight our obsession with stuff in his 1980s standup comedy routines. I hadn’t thought much about Carlin or stuff for decades—until 2015, when I inherited my parents’ stuff.
Not only did I inherit their stuff, I inherited some of their parents’ stuff and their grandparents’ stuff. Boxes, drawers and shelves full of unlabeled stuff. I wouldn’t call my parents hoarders.

Read more »

Cut It Out

IT ISN’T EASY sticking to a budget. I get it. Surprise expenses pop up all the time. How can you possibly be expected to live on a strict dollar amount each and every month?
The answer is, you don’t. But the key is to make sure you have enough financial breathing room, so you aren’t living paycheck to paycheck. That brings me to three common budget busters. These areas of your financial life, if ignored,

Read more »

Under the Influence

WE LIKE TO THINK we’re rational, especially when it comes to spending and investing. But in truth, all of us are susceptible to impulsive decision-making and unconscious persuasion. Result? We often end up wasting our hard-earned money.
According to traditional economics—which depicts humans as conscious, rational decision-makers—this shouldn’t happen. But this traditional view has been under attack since the late 1800s, when Thorstein Veblen explored conscious irrational decisions, such as buying items simply to impress others.

Read more »

Little Jack

I SUBSCRIBE to a number of financial magazines, as well as a daily newspaper. Lately, they’ve been piling up in my garage unread. I scan the front cover of the magazines and the headlines of the newspaper, but I’m not that interested. I don’t care about “Where to Invest Your Money in 2019” or “The Best Stocks for the Long Run.”
I guess it’s because I’m no longer in charge of my investment portfolio.

Read more »

Private Matters

IN SUMMER 2000, the Art Institute of Chicago fell under the spell of a young hedge fund manager named Conrad Seghers. The allure? Seghers claimed that his funds, called Integral, offered “the highest Sharpe ratios in the industry.” The Sharpe ratio is supposed to measure an investment’s risk relative to its returns and is popular in the world of hedge funds. Convinced by this pitch, the Art Institute committed more than $40 million of its endowment to Seghers’s funds.

Read more »

Money Guide

Taxables vs. Munis

TAXABLE BONDS—such as those issued by corporations—typically have relatively high yields, but you have to pay tax each year on the interest you earn, assuming you hold the bonds in a taxable account. Municipal bonds offer yields that are usually lower, but the interest should be tax-free. So which should you buy? Imagine you are in the 24% marginal federal income tax bracket and a 6% state income tax bracket, for a combined marginal rate of 30%. You’re considering buying a municipal bond that yields 4%, and that yield will be tax-free for you at both the federal and state level. How much would a taxable bond have to pay to give you the same after-tax yield? First, you have to convert your marginal tax bracket into a decimal by dividing it by 100. That turns your 30% to 0.3. Next, you subtract this 0.3 from 1, giving you 0.7. Finally, you divide the municipal bond’s 4% yield by 0.7, giving you 5.71%. This 5.71% is the yield that a taxable bond would have to offer to give you the same after-tax yield as the 4% municipal bond. What if you’re considering buying munis from an out-of-state issuer, so they would be tax-free at the federal level, but not the state level? In the above example, instead of adjusting for a 30% marginal rate, you would use 24%. Result: To find the tax-equivalent yield, you would divide the municipal bond’s yield by 0.76, so the tax-equivalent yield for a 4% muni would be 5.26%. What if you’re starting with a taxable bond—and trying to figure out how much a municipal bond would need to pay to be competitive? Instead of dividing the taxable bond’s yield by 0.7 or 0.76, you would multiply it by these figures. Suppose you are looking at a taxable bond that’s yielding 5%. If you multiply this 5% by 0.7, you would get 3.5%, which would be your after-tax yield from the taxable bond—and which is the amount that an in-state municipal bond would have to pay to give you the same yield. Even if municipals deliver a higher after-tax yield than taxable bonds, they aren’t necessarily your best bet, as we discuss in the chapter on taxes. Next: Save and Compound Previous: Taxed vs. Tax-Deferred Blog: Who Needs Munis?
Read more »

Numbers

ALMOST HALF of Americans receive health care coverage through an employer, 21% from Medicaid, 14% from Medicare, 7% through individual policies and 9% are uninsured, according to 2017 data from the Kaiser Family Foundation.

Newsletter

Out of the Swamp

WE CAN MEASURE our financial progress by the size of our net worth. But that’s hardly the only gauge. Equally important, I’d argue, is the evolution in how we think about money—and how we use it to improve our lives.
What does this journey look like? I picture it as having five stages:
1. Head above water. This is when you emerge from the primordial financial swamp and begin to walk upright.

Read More »

Archive

Safety Net: Questions

WANT TO MAKE sure your family is adequately protected against financial disaster? Try grappling with these 10 questions:
  1. What’s the minimum dollar amount you need each month to keep your household running? That’s a useful number to know if you’re forced to slash living costs because, say, you lost your job or you need to cover a large, unexpected medical bill.
  2. How would you cope financially if you were out of work for six months? Think about where you would get the money to cover household expenses—and whether you ought to cut living costs, build up your emergency fund and open a home-equity line of credit.
  3. If you’re retired, should you bother with a separate emergency fund? The big financial emergency is getting laid off—and that isn’t a risk once you’re retired.
  4. Who would suffer financially if you died tomorrow? If you’re single with no children at home, or you’re married to somebody with a healthy income, the answer may be no one. But if you’re the main breadwinner, with a spouse at home and young children, your death could wreak financial havoc—and you may need substantial amounts of life insurance.
  5. Do you own the right sort of life insurance? A majority of policies sold are cash-value policies, which involve hefty premiums—and which can crimp your ability to fund superior investment vehicles, such as your employer’s 401(k) plan. A better strategy: Max out your 401(k)—and protect your family with low-cost term insurance.
  6. Would your homeowner’s policy pay enough to allow you to rebuild? Rebuilding may prove surprisingly expensive, because your new home would need to meet current building codes.
  7. If you required nursing home care, how would you cover the cost? Can you afford to pay out of pocket, should you buy long-term-care insurance, or are you planning to deplete your assets and then fall back on Medicaid?
  8. To reduce premiums, should you raise the deductibles on your health, homeowner’s and auto policies, and also extend the elimination period on your long-term-care and disability insurance?
  9. Thanks to your growing wealth, could you afford to drop various insurance policies and instead self-insure? If you have more than $1 million in investable assets, you might have enough socked away to handle life’s financial disasters without help from life, disability and long-term-care insurance.
  10. Which of your assets would be protected if you got slapped with a lawsuit or had to file bankruptcy? Federal law would likely protect much or all of your retirement account money. But what additional protections are offered by state law?
This is the fourth blog in a series. The earlier articles were devoted to retirement, homes and college. Follow Jonathan on Twitter @ClementsMoney and on Facebook.
Read more »

Truths

NO. 27: COST-CONSCIOUS investors can save thousands over their lifetime. Take two investors who salt away $5,000 a year for 40 years. One pays 1% in annual costs, while the other incurs 0.1%. If both earn 5% a year before expenses, the cost-conscious investor will amass $618,000, while the high-cost investor garners $494,000.

Act

FUND YOUR IRA—FOR 2019. This time of year, folks are exhorted to get their IRAs funded for 2018 before the mid-April tax-filing deadline. That’s a good idea. But if you want to get the most out of your IRA, you should also make your 2019 contribution. That way, your money will be invested for longer—and there’s the potential for even more tax-advantaged growth.

Think

NEUROECONOMICS. To understand why we often make poor decisions, neuroeconomics studies how the brain reacts to financial situations. The research has confirmed insights first uncovered by behavioral finance, such as our strong aversion to losses, our fondness for long-shot investments and our preference for small rewards now over larger rewards later.

About Jonathan

Jonathan Clements

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.

Home Call to Action

College or Not?

SEVERAL MILLION households every year deal with a crucial decision involving their teenage children. Will their kids head to college, enter the labor force, join the military or perhaps do something different entirely? Often, this involves weighing the costs and benefits of a college education vs. the immediate income from getting a job.
About two-thirds of high school graduates end up being college freshmen. The remaining third defer or never go to college, but they can still end up earning above-average incomes.

Read more »

Other People’s Stuff

WE’VE ALL GOT stuff. Too much stuff. George Carlin was among the first to highlight our obsession with stuff in his 1980s standup comedy routines. I hadn’t thought much about Carlin or stuff for decades—until 2015, when I inherited my parents’ stuff.
Not only did I inherit their stuff, I inherited some of their parents’ stuff and their grandparents’ stuff. Boxes, drawers and shelves full of unlabeled stuff. I wouldn’t call my parents hoarders.

Read more »

Cut It Out

IT ISN’T EASY sticking to a budget. I get it. Surprise expenses pop up all the time. How can you possibly be expected to live on a strict dollar amount each and every month?
The answer is, you don’t. But the key is to make sure you have enough financial breathing room, so you aren’t living paycheck to paycheck. That brings me to three common budget busters. These areas of your financial life, if ignored,

Read more »

Under the Influence

WE LIKE TO THINK we’re rational, especially when it comes to spending and investing. But in truth, all of us are susceptible to impulsive decision-making and unconscious persuasion. Result? We often end up wasting our hard-earned money.
According to traditional economics—which depicts humans as conscious, rational decision-makers—this shouldn’t happen. But this traditional view has been under attack since the late 1800s, when Thorstein Veblen explored conscious irrational decisions, such as buying items simply to impress others.

Read more »

Little Jack

I SUBSCRIBE to a number of financial magazines, as well as a daily newspaper. Lately, they’ve been piling up in my garage unread. I scan the front cover of the magazines and the headlines of the newspaper, but I’m not that interested. I don’t care about “Where to Invest Your Money in 2019” or “The Best Stocks for the Long Run.”
I guess it’s because I’m no longer in charge of my investment portfolio.

Read more »

Private Matters

IN SUMMER 2000, the Art Institute of Chicago fell under the spell of a young hedge fund manager named Conrad Seghers. The allure? Seghers claimed that his funds, called Integral, offered “the highest Sharpe ratios in the industry.” The Sharpe ratio is supposed to measure an investment’s risk relative to its returns and is popular in the world of hedge funds. Convinced by this pitch, the Art Institute committed more than $40 million of its endowment to Seghers’s funds.

Read more »

Numbers

ALMOST HALF of Americans receive health care coverage through an employer, 21% from Medicaid, 14% from Medicare, 7% through individual policies and 9% are uninsured, according to 2017 data from the Kaiser Family Foundation.

Act

FUND YOUR IRA—FOR 2019. This time of year, folks are exhorted to get their IRAs funded for 2018 before the mid-April tax-filing deadline. That’s a good idea. But if you want to get the most out of your IRA, you should also make your 2019 contribution. That way, your money will be invested for longer—and there’s the potential for even more tax-advantaged growth.

Truths

NO. 27: COST-CONSCIOUS investors can save thousands over their lifetime. Take two investors who salt away $5,000 a year for 40 years. One pays 1% in annual costs, while the other incurs 0.1%. If both earn 5% a year before expenses, the cost-conscious investor will amass $618,000, while the high-cost investor garners $494,000.

Think

NEUROECONOMICS. To understand why we often make poor decisions, neuroeconomics studies how the brain reacts to financial situations. The research has confirmed insights first uncovered by behavioral finance, such as our strong aversion to losses, our fondness for long-shot investments and our preference for small rewards now over larger rewards later.

Home Call to Action

Free Newsletter

Out of the Swamp

WE CAN MEASURE our financial progress by the size of our net worth. But that’s hardly the only gauge. Equally important, I’d argue, is the evolution in how we think about money—and how we use it to improve our lives.
What does this journey look like? I picture it as having five stages:
1. Head above water. This is when you emerge from the primordial financial swamp and begin to walk upright.

Read More »

Money Guide

Start Here

Taxables vs. Munis

TAXABLE BONDS—such as those issued by corporations—typically have relatively high yields, but you have to pay tax each year on the interest you earn, assuming you hold the bonds in a taxable account. Municipal bonds offer yields that are usually lower, but the interest should be tax-free. So which should you buy? Imagine you are in the 24% marginal federal income tax bracket and a 6% state income tax bracket, for a combined marginal rate of 30%. You’re considering buying a municipal bond that yields 4%, and that yield will be tax-free for you at both the federal and state level. How much would a taxable bond have to pay to give you the same after-tax yield? First, you have to convert your marginal tax bracket into a decimal by dividing it by 100. That turns your 30% to 0.3. Next, you subtract this 0.3 from 1, giving you 0.7. Finally, you divide the municipal bond’s 4% yield by 0.7, giving you 5.71%. This 5.71% is the yield that a taxable bond would have to offer to give you the same after-tax yield as the 4% municipal bond. What if you’re considering buying munis from an out-of-state issuer, so they would be tax-free at the federal level, but not the state level? In the above example, instead of adjusting for a 30% marginal rate, you would use 24%. Result: To find the tax-equivalent yield, you would divide the municipal bond’s yield by 0.76, so the tax-equivalent yield for a 4% muni would be 5.26%. What if you’re starting with a taxable bond—and trying to figure out how much a municipal bond would need to pay to be competitive? Instead of dividing the taxable bond’s yield by 0.7 or 0.76, you would multiply it by these figures. Suppose you are looking at a taxable bond that’s yielding 5%. If you multiply this 5% by 0.7, you would get 3.5%, which would be your after-tax yield from the taxable bond—and which is the amount that an in-state municipal bond would have to pay to give you the same yield. Even if municipals deliver a higher after-tax yield than taxable bonds, they aren’t necessarily your best bet, as we discuss in the chapter on taxes. Next: Save and Compound Previous: Taxed vs. Tax-Deferred Blog: Who Needs Munis?
Read more »

Archive

Safety Net: Questions

WANT TO MAKE sure your family is adequately protected against financial disaster? Try grappling with these 10 questions:
  1. What’s the minimum dollar amount you need each month to keep your household running? That’s a useful number to know if you’re forced to slash living costs because, say, you lost your job or you need to cover a large, unexpected medical bill.
  2. How would you cope financially if you were out of work for six months? Think about where you would get the money to cover household expenses—and whether you ought to cut living costs, build up your emergency fund and open a home-equity line of credit.
  3. If you’re retired, should you bother with a separate emergency fund? The big financial emergency is getting laid off—and that isn’t a risk once you’re retired.
  4. Who would suffer financially if you died tomorrow? If you’re single with no children at home, or you’re married to somebody with a healthy income, the answer may be no one. But if you’re the main breadwinner, with a spouse at home and young children, your death could wreak financial havoc—and you may need substantial amounts of life insurance.
  5. Do you own the right sort of life insurance? A majority of policies sold are cash-value policies, which involve hefty premiums—and which can crimp your ability to fund superior investment vehicles, such as your employer’s 401(k) plan. A better strategy: Max out your 401(k)—and protect your family with low-cost term insurance.
  6. Would your homeowner’s policy pay enough to allow you to rebuild? Rebuilding may prove surprisingly expensive, because your new home would need to meet current building codes.
  7. If you required nursing home care, how would you cover the cost? Can you afford to pay out of pocket, should you buy long-term-care insurance, or are you planning to deplete your assets and then fall back on Medicaid?
  8. To reduce premiums, should you raise the deductibles on your health, homeowner’s and auto policies, and also extend the elimination period on your long-term-care and disability insurance?
  9. Thanks to your growing wealth, could you afford to drop various insurance policies and instead self-insure? If you have more than $1 million in investable assets, you might have enough socked away to handle life’s financial disasters without help from life, disability and long-term-care insurance.
  10. Which of your assets would be protected if you got slapped with a lawsuit or had to file bankruptcy? Federal law would likely protect much or all of your retirement account money. But what additional protections are offered by state law?
This is the fourth blog in a series. The earlier articles were devoted to retirement, homes and college. Follow Jonathan on Twitter @ClementsMoney and on Facebook.
Read more »
Jonathan Clements

About Jonathan

HumbleDollar is edited by Jonathan Clements, author of From Here to Financial Happiness.