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Unpaid bills. Unprepared for financial emergencies. No retirement savings. No will. How’s that denial working for you?

Bracketology

EVERY YEAR, the NCAA basketball season concludes with the March Madness playoffs. Many Americans engage in bracketology—trying to figure out which teams will get knocked out in each round and which will advance. Warren Buffett even offers an annual bracket-picking challenge, where Berkshire employees can win $1 million a year for life.
This year, however, Americans with substantial retirement accounts might also want to try another form of bracketology: studying the 2017 tax law—and asking whether it offers a unique opportunity to convert hefty amounts of traditional IRA money to a Roth IRA.

Read more »

Head Games

AS I DRIVE around town these days, I notice a lot of cars with temporary license plates—an indication they were recently purchased. What’s the reason? When I turn on the TV, I see a commercial for a local car dealership that’s offering to accept your tax refund as the down payment on a new car. Now it starts to make sense.
The dealership knows consumers are about to receive an influx of cash. It wants to make it as painless as possible to buy a new car.

Read more »

Get a Life

IN MY ROLE as a financial planner, I hear a lot of stories. By far the most appalling and upsetting relate to life insurance. All too often, insurance salespeople leave clients with policies that are simultaneously overpriced, inadequate and inappropriate.
Are you evaluating a policy? Here’s a quick summary of the most important considerations:
What type of coverage should I have? Life insurance comes in two primary flavors: term and permanent. Term insurance,

Read more »

Newsletter No. 45

AS THE SAYING goes, “If you don’t stand for something, you’ll fall for anything.” So what do HumbleDollar’s readers stand for? What are the key principles that should govern how we manage our money? In recent weeks, I’ve been drawing up a manifesto for the site.
It’s a work in progress. I’ve included a dozen of the principles in our latest newsletter—and, in the months ahead, you’ll find further additions appearing every few days on the homepage.

Read more »

How to Blow It

THERE’S AN abundance of advice on how to plan for retirement. Oh, it’s good advice. But it’s also a bit complicated, often requires discipline and always necessitates actually doing something.
And let’s face it: Who needs advice? Who wants to actually do something? Here are 20 ways to ignore the experts—and wreck your chances of a financially comfortable retirement:
1. Keep thinking retirement is so far in the future that there’s no need to act now.

Read more »

Five Mistakes

WHEN I TAUGHT economics, I would present students with the financial misunderstandings that people often have—and which the study of economics can help them avoid. Examples? Here are five widespread misconceptions:
Mistake No. 1: The rarer something is, the more valuable it is. Economics really doesn’t care about rare things—meaning those things that are few in number. Instead, economics deals with scarce things, which are things for which there’s greater demand than current ways to fulfill that demand.

Read more »

Money Guide

Fat Tails

EXTREME EVENTS happen more frequently than we imagine—including in the financial world. Think about recent decades. We had the stunning stock market rally of the late 1990s and the subsequent stunning decline, especially among technology stocks. We had the housing mania that peaked in mid-2006 and the grueling bust that followed. We had the financial crisis of 2008, with reverberations still felt today. In his 2007 book The Black Swan, Nassim Nicholas Taleb highlighted how the supposedly improbable occurs with surprising frequency—and yet folks are shocked every time. Such extreme events suggest that, instead of market returns being normally distributed, with most years seeing middling performance, the tails of this humped-back distribution curve tend to be fat because of the surprising number of extreme events, hence the term “fat tails.” This can be seen as evidence of market inefficiency: Far from being rational, investors tend to be a little manic, becoming both overly exuberant and excessively pessimistic in response to economic and political developments. For those looking to time the market, this might make their venture seem more promising. But fat-tail events might also be viewed as another reason for humility. Few people forecasted the extreme events that we have seen in recent decades. Given that these extreme events seem to be relatively commonplace, we should probably avoid making overly large bets on any one investment, so we don’t miss out on the next surprising market surge or run the risk of seeing our portfolio hurt by the next unforeseen disaster. Next: Stock Picking Previous: Market Timing
Read more »

Numbers

IF YOU EARN $20,000, 55% of Americans would consider you poor, according to YouGov.com. But at $30,000, only 32% say you’re poor, while 50% would deem you neither rich nor poor. Meanwhile, a majority (56%) consider you rich once you earn $100,000.

Newsletter

Got to Believe

AS I’VE BUILT out HumbleDollar.com over the past few years, I’ve come to view the site not merely as a place where folks can learn about financial issues, but as a community that thinks about money in a unique way.
This shows up repeatedly in articles from guest contributors, with their focus on topics like spending thoughtfully, helping family, behavioral finance, indexing and achieving financial freedom. It’s a community where folks are trying to be rational about money,

Read More »

Archive

Reaping Windfalls

MANY EMPLOYEES deliberately have too much income tax withheld from their paycheck, so they receive a fat refund each spring. Federal refunds averaged $2,850 per income-tax return in 2014, the latest year for which data is available. This is completely irrational and entirely sensible. It’s irrational, because we’re making an interest-free loan to Uncle Sam. Why not have the correct amount of tax withheld, and then take a sliver of each paycheck and pop it in a high-yield savings account, so we’re the ones earning interest? We, of course, already know the answer: If the money was in our regular paycheck, we’d likely spend it. But if we get a lump sum as a tax refund, the money will seem more significant. Instead of frittering it away, we might save the money or use it to pay down debt. Homo economicus may always behave rationally, but we humans need a little trickery if we’re going to spend less today and save more for tomorrow. In addition to tax refunds, we might receive other windfalls, such as a year-end bonus, an inheritance, and income from freelance work or a second job. There might also be smaller sums, such as reimbursement from our employer for travel expenses or the cash back we’ve accumulated by using a rewards credit card. In each case, these sums aren’t part of our regular income, so they can be a painless source of extra savings. Over the years, my own nest egg has received a big boost from such windfalls, including advances for various books I’ve written and the year-end bonuses I received when I worked at Citigroup. Each time, I used the money for a special purpose, such as building up my mutual fund accounts, paying off a chunk of my mortgage or funding home remodeling projects. Admittedly, the latter shouldn’t be considered an investment (or, if they are, they aren't good ones). But in each instance, I never simply spent the money, with nothing to show for it.
Read more »

Manifesto

NO. 48: A HOME is a lousy source of capital gains and a great source of imputed rent. The upshot: We should buy a house we can comfortably afford and that’s big enough for our family—but no bigger.

Truths

NO. 33: MOST INVESTORS trail the market averages. That’s true whether a market is considered efficient or inefficient. Before investment costs, we collectively earn the results of the market averages. After costs, we must earn less. In fact, investors—as a group—will trail the market by a sum equal to their investment costs.

Act

THINK OF YOUR assets as income. If you retired today, how much income would your nest egg generate? One rule of thumb says that, in the first year of retirement, you can withdraw 4% of your portfolio’s value, equal to $4,000 for every $100,000 saved. It’s a sobering way to assess your retirement readiness—and it might prompt you to save more, postpone retirement or work part-time in retirement.

Think

LONGEVITY RISK. Spending down a retirement portfolio is tricky: You don’t know how long you will live—and hence there’s a risk you’ll run out of money before you run out of breath. To fend off that risk, limit annual portfolio withdrawals to 4% or 5%, delay Social Security to get a larger check and consider an immediate annuity that pays lifetime income.

About Jonathan

Jonathan Clements

HumbleDollar is edited by Jonathan Clements, former personal finance columnist for The Wall Street Journal.

Home Call to Action

Bracketology

EVERY YEAR, the NCAA basketball season concludes with the March Madness playoffs. Many Americans engage in bracketology—trying to figure out which teams will get knocked out in each round and which will advance. Warren Buffett even offers an annual bracket-picking challenge, where Berkshire employees can win $1 million a year for life.
This year, however, Americans with substantial retirement accounts might also want to try another form of bracketology: studying the 2017 tax law—and asking whether it offers a unique opportunity to convert hefty amounts of traditional IRA money to a Roth IRA.

Read more »

Head Games

AS I DRIVE around town these days, I notice a lot of cars with temporary license plates—an indication they were recently purchased. What’s the reason? When I turn on the TV, I see a commercial for a local car dealership that’s offering to accept your tax refund as the down payment on a new car. Now it starts to make sense.
The dealership knows consumers are about to receive an influx of cash. It wants to make it as painless as possible to buy a new car.

Read more »

Get a Life

IN MY ROLE as a financial planner, I hear a lot of stories. By far the most appalling and upsetting relate to life insurance. All too often, insurance salespeople leave clients with policies that are simultaneously overpriced, inadequate and inappropriate.
Are you evaluating a policy? Here’s a quick summary of the most important considerations:
What type of coverage should I have? Life insurance comes in two primary flavors: term and permanent. Term insurance,

Read more »

Newsletter No. 45

AS THE SAYING goes, “If you don’t stand for something, you’ll fall for anything.” So what do HumbleDollar’s readers stand for? What are the key principles that should govern how we manage our money? In recent weeks, I’ve been drawing up a manifesto for the site.
It’s a work in progress. I’ve included a dozen of the principles in our latest newsletter—and, in the months ahead, you’ll find further additions appearing every few days on the homepage.

Read more »

How to Blow It

THERE’S AN abundance of advice on how to plan for retirement. Oh, it’s good advice. But it’s also a bit complicated, often requires discipline and always necessitates actually doing something.
And let’s face it: Who needs advice? Who wants to actually do something? Here are 20 ways to ignore the experts—and wreck your chances of a financially comfortable retirement:
1. Keep thinking retirement is so far in the future that there’s no need to act now.

Read more »

Five Mistakes

WHEN I TAUGHT economics, I would present students with the financial misunderstandings that people often have—and which the study of economics can help them avoid. Examples? Here are five widespread misconceptions:
Mistake No. 1: The rarer something is, the more valuable it is. Economics really doesn’t care about rare things—meaning those things that are few in number. Instead, economics deals with scarce things, which are things for which there’s greater demand than current ways to fulfill that demand.

Read more »

Numbers

IF YOU EARN $20,000, 55% of Americans would consider you poor, according to YouGov.com. But at $30,000, only 32% say you’re poor, while 50% would deem you neither rich nor poor. Meanwhile, a majority (56%) consider you rich once you earn $100,000.

Manifesto

NO. 48: A HOME is a lousy source of capital gains and a great source of imputed rent. The upshot: We should buy a house we can comfortably afford and that’s big enough for our family—but no bigger.

Act

THINK OF YOUR assets as income. If you retired today, how much income would your nest egg generate? One rule of thumb says that, in the first year of retirement, you can withdraw 4% of your portfolio’s value, equal to $4,000 for every $100,000 saved. It’s a sobering way to assess your retirement readiness—and it might prompt you to save more, postpone retirement or work part-time in retirement.

Truths

NO. 33: MOST INVESTORS trail the market averages. That’s true whether a market is considered efficient or inefficient. Before investment costs, we collectively earn the results of the market averages. After costs, we must earn less. In fact, investors—as a group—will trail the market by a sum equal to their investment costs.

Think

LONGEVITY RISK. Spending down a retirement portfolio is tricky: You don’t know how long you will live—and hence there’s a risk you’ll run out of money before you run out of breath. To fend off that risk, limit annual portfolio withdrawals to 4% or 5%, delay Social Security to get a larger check and consider an immediate annuity that pays lifetime income.

Home Call to Action

Free Newsletter

Got to Believe

AS I’VE BUILT out HumbleDollar.com over the past few years, I’ve come to view the site not merely as a place where folks can learn about financial issues, but as a community that thinks about money in a unique way.
This shows up repeatedly in articles from guest contributors, with their focus on topics like spending thoughtfully, helping family, behavioral finance, indexing and achieving financial freedom. It’s a community where folks are trying to be rational about money,

Read More »

Money Guide

Start Here

Fat Tails

EXTREME EVENTS happen more frequently than we imagine—including in the financial world. Think about recent decades. We had the stunning stock market rally of the late 1990s and the subsequent stunning decline, especially among technology stocks. We had the housing mania that peaked in mid-2006 and the grueling bust that followed. We had the financial crisis of 2008, with reverberations still felt today. In his 2007 book The Black Swan, Nassim Nicholas Taleb highlighted how the supposedly improbable occurs with surprising frequency—and yet folks are shocked every time. Such extreme events suggest that, instead of market returns being normally distributed, with most years seeing middling performance, the tails of this humped-back distribution curve tend to be fat because of the surprising number of extreme events, hence the term “fat tails.” This can be seen as evidence of market inefficiency: Far from being rational, investors tend to be a little manic, becoming both overly exuberant and excessively pessimistic in response to economic and political developments. For those looking to time the market, this might make their venture seem more promising. But fat-tail events might also be viewed as another reason for humility. Few people forecasted the extreme events that we have seen in recent decades. Given that these extreme events seem to be relatively commonplace, we should probably avoid making overly large bets on any one investment, so we don’t miss out on the next surprising market surge or run the risk of seeing our portfolio hurt by the next unforeseen disaster. Next: Stock Picking Previous: Market Timing
Read more »

Archive

Reaping Windfalls

MANY EMPLOYEES deliberately have too much income tax withheld from their paycheck, so they receive a fat refund each spring. Federal refunds averaged $2,850 per income-tax return in 2014, the latest year for which data is available. This is completely irrational and entirely sensible. It’s irrational, because we’re making an interest-free loan to Uncle Sam. Why not have the correct amount of tax withheld, and then take a sliver of each paycheck and pop it in a high-yield savings account, so we’re the ones earning interest? We, of course, already know the answer: If the money was in our regular paycheck, we’d likely spend it. But if we get a lump sum as a tax refund, the money will seem more significant. Instead of frittering it away, we might save the money or use it to pay down debt. Homo economicus may always behave rationally, but we humans need a little trickery if we’re going to spend less today and save more for tomorrow. In addition to tax refunds, we might receive other windfalls, such as a year-end bonus, an inheritance, and income from freelance work or a second job. There might also be smaller sums, such as reimbursement from our employer for travel expenses or the cash back we’ve accumulated by using a rewards credit card. In each case, these sums aren’t part of our regular income, so they can be a painless source of extra savings. Over the years, my own nest egg has received a big boost from such windfalls, including advances for various books I’ve written and the year-end bonuses I received when I worked at Citigroup. Each time, I used the money for a special purpose, such as building up my mutual fund accounts, paying off a chunk of my mortgage or funding home remodeling projects. Admittedly, the latter shouldn’t be considered an investment (or, if they are, they aren't good ones). But in each instance, I never simply spent the money, with nothing to show for it.
Read more »
Jonathan Clements

About Jonathan

HumbleDollar is edited by Jonathan Clements, former personal finance columnist for The Wall Street Journal.