Thinking About Money
Jonathan Clements | October 20, 2018
I HAVE SPENT 33 years writing and thinking about money. I’m not sure it’s the most uplifting way to spend one’s life, but it’s kept me busy and—for the most part—out of trouble.
Two years ago, I took some of the financial ideas that have especially intrigued me over the past three decades, and I brought them together in a slim volume called How to Think About Money. The book proved surprisingly popular, so I recently updated it for a global audience.
How to Think About Money touches on topics such as happiness research, our rising life expectancy, behavioral finance and the importance of our human capital—and then teases out the implications for our financial lives. Here, pulled from the book’s final chapter, are 12 suggestions for how to get the most out of our money:
- We favor possessions for their lasting value, but often we get greater happiness when we spend our money on experiences. Forget the new car. Instead, take the family to Paris.
- We should use our dollars, pounds or euros to create special times with friends and family. Take the kids to a sports event and your spouse to the theater. Have dinner out with friends. Book a trip to see the grandchildren.
- We should design a life for ourselves where we can spend our days doing what we love. To that end, we should save every penny we can early in our adult life, so we quickly buy ourselves some financial freedom. In our 40s or 50s, we might use that freedom to switch into a career that’s perhaps less lucrative, but which we may find more fulfilling.
- We should worry less about dying early in retirement, and more about living longer than we ever imagined. Faced with that risk, most of us should delay Social Security to get a larger monthly check, and also consider buying immediate annuities that pay lifetime income.
- Our investment time horizon is measured not in months and years, but in decades and decades. We should strive to look beyond the market’s short-term turmoil and instead aim to collect the staggering gains that can accrue to those who hold globally diversified stock portfolios for 30 or even 50 years. Indeed, while a long bear market can impoverish retirees who don’t have enough in bonds and cash investments, it can be a great gift to young adults who are good savers, because it offers the chance to buy stocks at bargain prices.
- We should hold down our fixed monthly costs, such as the sum we devote to mortgage or rent, cars, utilities, groceries and insurance premiums. Those low fixed costs will give us additional financial breathing room, which can ease our sense of financial stress, leave us with more money for discretionary “fun” spending—and allow us to save voraciously.
- Good savings habits don’t come naturally, so we need to make socking away money as painless as possible. That means signing up for payroll contributions to our employer’s retirement plan and setting up automatic investment plans, where money is pulled from our bank account each month and invested directly into the funds we choose. It also means adopting easy-to-follow financial rules, such as always adding $50 or $100 to the monthly mortgage payment and always saving financial windfalls, including tax refunds and income from a second job.
- The harder we try to beat the market, the more likely we are to fail, thanks to the hefty investment costs we incur. To avoid that fate, we should stop trying to outsmart other investors and instead embrace humility—in the guise of a globally diversified portfolio of low-cost index funds.
- We should never forget that stocks have fundamental value. For a diversified stock portfolio, that fundamental value will change much more slowly than market prices. To keep ourselves grounded, we should focus on the dividends and earnings we buy with every dollar, pound or euro invested, we should have a handle on the market’s likely long-run return, and we should think like shoppers, viewing market declines with the same enthusiasm that we view a sale at the local department store.
- Chronologically, retirement might be our life’s final financial goal, but we should always put it first. Retirement is the most expensive of our goals, and hence we need to save and collect investment gains for many decades to amass enough money. Retirement is also distinctly different from other goals, like buying a home or paying for our children’s education. What’s different? Retirement won’t be optional for most of us and we can’t expect to pay for it out of our paycheck, because at that point we won’t have one.
- We should take a broad view of our finances—and the unifying notion should be the income from our human capital, or the lack thereof. The paychecks we collect over our lifetime are like a bond that generates 40 years of fairly steady income. That income stream can diversify a portfolio that’s heavily invested in stocks, provide the savings we need to set aside for retirement, and allow us to take on debt early in our adult life and then repay it by the time we retire. We also need to protect our human capital, by ensuring we have adequate health coverage, and sufficient disability and life insurance.
- The goal isn’t to get rich. Rather, the goal is to have enough money to lead the life we want. We shouldn’t put that at risk by incurring excessive investment costs, straying too far from a global indexing strategy and failing to buy insurance against major financial risks.
WANT A COPY of the new international edition of How to Think About Money? You can purchase it directly from the U.K. publisher, Harriman House, for £12.99, equal to around $17.
Problem is, if you’re outside the U.K., Harriman will likely charge you £4.50 for international shipping. To offset that cost, I asked Harriman for a special discount for HumbleDollar readers. If you buy from the Harriman website, you can use this promo code during checkout: H2TAMoffer. That’ll save you £4.50. The promo code is good through Nov. 5.
- “I know of a retiree who says he’s quite happy living in a trailer on $1,300 a month,” writes Richard Quinn. “How does that square with the conventional wisdom that, once retired, you need 80% of preretirement income?”
- Should you convert your traditional IRA to a Roth? As you wrestle with the question, Adam Grossman suggests working through five key steps.
- “I think of my low fixed expenses as a wall protecting me from disaster,” says Dennis Friedman. “Reducing expenses can be a first responder that saves you in a financial emergency.”
- Volunteers for charitable organizations can deduct their unreimbursed out-of-pocket expenses—though there are limits to the IRS’s generosity, warns Julian Block.
- “Is the giant turkey leg you’re chomping on, while waiting in line for that next Disney attraction, really worth paying 20% interest?” asks Richard Quinn.
- Half of Americans—and likely more—are at risk of failing to maintain their standard of living once they retire. What to do? Here are five super-simple strategies that everybody could benefit from.
- “My co-workers knew I had a financial background, so they often came to me with their statements,” recalls Tony Isola. “High-fee variable annuities and loaded mutual funds littered the crime scene.”
- Crisis? What crisis? John Lim argues that bear markets offer three huge financial benefits.
- “If you conclude that a change is in order for your portfolio, don’t worry that it’s too late,” says Adam Grossman. “Yes, stocks are down from where they were trading in recent weeks. But recognize that those were all-time highs.”
- Jiab Wasserman calculated that she and her husband could retire in Spain on just $30,000 a year. So they packed their bags and went for it.
- “I kept thinking that someday I’d come around to more bonds, but not now,” writes Dennis Quillen. “The years went by. I took early retirement at age 62 and still had zero dollars in bonds.”
- It’s difficult to recognize progress, including our own financial progress. Ross Menke’s advice: Keep reminders of your achievements, find an accountability partner—and track your net worth.
- “While the market is still near its all-time high, check your asset allocation,” advises Adam Grossman. “Even if you have a view on the way things will turn out, make sure you’ll be okay if it goes the other way.”
Follow Jonathan on Twitter and on Facebook. His other new book, From Here to Financial Happiness, can now be ordered from Amazon and Barnes & Noble. Jonathan’s most recent articles include The Other Half, A Good Life and Jack of Hearts.