Third Rail

Jonathan Clements

IF I’M EVER FEELING lonely, all I need to do is write about certain financial topics—and soon enough my inbox is brimming with emails, some vehemently disagreeing, others offering vigorous nods of assent.

A dozen of those topics are covered in HumbleDollar’s new chapter devoted to great debates—issues like whether money buys happiness, when to claim Social Security and whether individual bonds are superior to bond mutual funds. But those subjects aren’t the only ones that stir up readers. Here are four other contentions that are almost guaranteed to trigger pointed comments:

1. Budgeting is for the irresponsible. To be sure, some folks budget because it gives them a greater sense of control over their finances. But I’d argue that, if you’re saving a decent chunk of your income toward retirement and other goals, it doesn’t much matter much how you spend the rest of your paycheck—and there’s no need to budget.

Instead, the people who need to budget are those who aren’t saving enough, and who need to figure out where their money goes and become much more deliberate about their spending. For these folks, budgeting—especially if they make a point of writing down every dollar they spend—can unleash a newfound frugality.

But most of the time, I suspect budgeting is like dieting: Most folks who try it don’t get the results they desire, because—without a total commitment to change—it simply feels too much like deprivation.

2. Children aren’t cheap. Many people believe children are priceless. I can assure that this is not the case—and I have decades of bills to prove it. This has not deterred me from having two children or taking partial responsibility for two stepchildren.

I’m not saying that choosing to have children should be a financial decision. But I do think parents need to have their eyes wide open. Raising children is costly, making it harder to achieve other financial goals, such as early retirement.

That cost potentially includes paying $100,000, and perhaps far more, for college. I don’t think parents are duty-bound to cover their kids’ higher education expenses. But I do believe they have an obligation to guide their children’s college choices—and to dissuade their kids from attending a college that involves student loans they’ll be hard-pressed to repay.

3. An emergency fund is an unemployment fund. Financial emergencies may not be foreseeable, but most of them should be manageable if we have a modest amount of savings. The big exception: getting laid off.

One rule of thumb suggests keeping emergency money equal to six months of living expenses. I’ve always presumed it’s stated that way because the big financial risk is being out of work for that long. If you were, the cost could run into the tens of thousands of dollars.

What about other financial emergencies, such as a hefty car repair bill, a broken furnace or major medical expenses? The cost should be under $10,000. Take major medical expenses. Many policies have an annual out-of-pocket maximum, such as 2019’s $7,900 for an individually purchased policy. I’m not saying $7,900 wouldn’t sting. But you could run through far more money if you lost your job.

One implication: If you’re retired, you don’t need to hold nearly so much emergency money—and perhaps none at all. As part of your retirement income strategy, you might keep five years of portfolio withdrawals in cash investments and short-term bonds. What if you got hit with a surprise expense? You could always dip into your five-year stash, and then replenish from longer-term investments whenever the market allows.

4. Paying down a mortgage is a solid investment. I’ve been arguing this one for years—but it’s become a whole lot easier to make the case. The 2017 tax law roughly doubled the size of the standard deduction, while capping the itemized deduction for state, local and property taxes at $10,000. Result: Many folks now get little or no tax benefit from their mortgage interest, especially if they file as married filing jointly or head of household.

Let’s say you have a mortgage charging 4%. If you aren’t getting a tax deduction for the mortgage interest, it’s costing you the full 4%. You should earn more than that over the long haul by buying stocks.

What if your inclination is to purchase bonds? You might come out ahead if you buy bonds in a 401(k) where you’re getting a matching employer contribution. Even if you aren’t getting the match, you might do better if you buy bonds yielding more than 4% in a tax-deductible or Roth retirement account. But the odds are, you’ll also be taking far more risk. How so? The return from paying down a mortgage is guaranteed—but, in today’s world, a bond yielding more than 4% will involve some risk of default.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Get HappyDeveloping StoryWhere It Goes and Down the Drain. Jonathan’s latest books: From Here to Financial Happiness and How to Think About Money.

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