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MY FATHER-IN-LAW—known to his family as Papa—passed away earlier this month. After 96 years, he had developed a number of money habits that were unconventional but quite effective, including these three:
1. Focused frugality. Papa was frugal, but not in the conventional sense. He didn’t practice extreme frugality and saw no virtue in intentional self-denial. Rather, he practiced what I would call focused frugality. If something was important—his children’s education, for example—he was happy to write that check. He also loved to travel. In those cases, Papa left frugality at the door. But for everything else, he stretched a dollar as far as it would go. And that ended up being remarkably far.
In his later years, I served as my father-in-law’s informal financial advisor. During one of our periodic reviews, he asked what I thought about his asset allocation—that is, his split between stocks and other assets. I responded with a standard question asked by financial planners: “How much do you need to withdraw from your account each year?”
His reply was one I had never heard before—certainly not from a retiree. “What do you mean by need?” he asked. After some more discussion, I realized that, even in his late 80s, his retirement accounts remained untouched, other than for required minimum distributions. How did he accomplish this? In large part, I believe, it was this focused frugality.
The lesson: A penny saved is a penny earned. Even if you spend freely with one part of your budget, that doesn’t mean you need to abandon frugality altogether. You can take nice vacations and drive a nice car, and still clip coupons. These are not mutually exclusive. In fact, I see them as symbiotic. When you economize ruthlessly in one area, that allows you to spend freely in other areas.
2. “Inefficient” debt management. It would be an overstatement to say my father-in-law hated debt. But having grown up in North Africa, he simply wasn’t accustomed to it. He took out a mortgage to buy a home but, other than that, I don’t think he ever carried a dime of debt: no credit cards, no car loans, no home-equity line of credit, nothing. In America, where consumers hold almost $14 trillion of debt, this certainly made him unusual.
I always found this interesting, because any personal finance textbook will tell you that debt, used wisely, is not necessarily a bad thing. Conventional wisdom, in fact, states that consumers should be happy to borrow money when it enables them to invest and earn potentially higher returns. Papa, however, wasn’t interested in what the textbook said. He took a much more straightforward approach. He would buy something only if he could pay cash. What if he couldn’t? The purchase would simply have to wait.
The lesson: In theory, it’s inefficient to avoid debt. But my father-in-law was not the only one to realize that “efficiency” is just a textbook concept. In the real world, there are many benefits to limiting debt. There’s the peace-of-mind benefit. But there’s another, more subtle advantage: When you stick to cash for major purchases, the inevitable result is that you end up spending less. In fact, research has found that consumers spend up to 50% less when they use cash instead of a credit card. Looking to trim your budget? Try leaving your credit cards at home for a week.
3. “Inefficient” asset allocation. For a retiree in his or her 80s or 90s, a typical asset allocation would consist mainly of bonds. My father-in-law, however, never saw the appeal of bonds and instead limited his portfolio to stocks and cash. Was this inefficient? Yes, perhaps he could have earned more by owning bonds instead of cash. But this is what he preferred.
The lesson: The definition of the “best” investment portfolio isn’t necessarily the one that offers the greatest profit potential. The best portfolio, especially for a do-it-yourself investor, is the one that is easy to set up, easy to manage and allows you to reach your goals. You run a far greater risk trying to make your portfolio “sophisticated” than by simplifying it. Never forget: Simple doesn’t mean simplistic.
Adam M. Grossman’s previous articles include Fact vs. Fantasy, Out of Stock and Say No to Mo. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.
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Hi there Adam,
Your FIL’s thoughts about keeping a portfolio simply between stocks and cash remind me of this JLC post about his two-stage allocations — 100/0 stock/cash in the accumulation phase and then 88/12 stock/cash in the spending phase.
I don’t imagine you’ll agree with all the points though he does make fair and entertaining points.
https://jlcollinsnh.com/2012/05/12/stocks-part-vi-portfolio-ideas-to-build-and-keep-your-wealth/