Go to Extremes

Jonathan Clements

IT’S RISKY TO LAY down hard-and-fast rules for money management because, for every rule, there will almost inevitably be exceptions.

Still, as they say, “nothing ventured, nothing gained.” Below you’ll find 18 rules. Want to quibble? Hey, that’s why HumbleDollar allows readers to comment on articles.

1. Minimize cash. With short-term interest rates so low, keeping money in savings accounts and money market funds seems especially grim right now. But the truth is, cash has always been a lousy long-term holding, pretty much guaranteeing your money will depreciate once inflation and taxes are figured in.

2. Maximize stocks. Owning a diversified stock portfolio has proven to be a remarkably simple way to build wealth over the long haul—and the only struggle is ignoring the constant temptation to focus on short-run results. No, you shouldn’t have money in the stock market that you’ll need to spend in the next five years. But it’s a great place to invest the rest of your portfolio.

3. Minimize complexity. This is advice Wall Street desperately wants you to ignore because, for the Street, complexity is the key to higher fees. Don’t understand an investment or investment strategy? Just say no.

4. Minimize trading. If athletes train harder or business owners put in longer hours, they’ll often get better results. But for investors, vigorous activity—as represented by more trading—is usually a recipe for disaster. Not only is trading costly (yes, even when commissions are zero), but also it can trigger big tax bills.

5. Maximize tax deferral. I’ve lately been hearing a fair amount of carping about traditional retirement accounts, where you get an initial tax deduction but have to pay income taxes on withdrawals. I think this is wrongheaded. Do the math and you’ll find the initial tax deduction often effectively pays for the eventual tax bill. Don’t think the math will work in your favor? You can always opt not for tax-deferred growth, but tax-free growth—by favoring Roth 401(k)s and Roth IRAs, including the so-called backdoor Roth.

6. Maximize indexing. Every dollar of your portfolio that you actively manage is a dollar that’ll likely end up earning mediocre returns, thanks to the investment expenses you incur. Want to avoid needless costs and ensure you keep pace with the market averages? Buy broad market index funds.

7. Maximize compounding. This is partly about maximizing time in the market by buying stocks early in life and by helping the next generation to get started. But it’s also about diversifying broadly and thereby avoiding the hefty losses that can come with betting on a single market sector or a handful of stocks. Such losses can devastate compounding because they’re so hard to recover from.

8. Minimize noise. By this, I mean minimize consumption of useless information and especially market information. Listening to CNBC and tracking the financial markets throughout the day will likely lead to more bad decisions than good. What if you can consume this information without acting on it? You’re still wasting great gobs of precious time.

9. Minimize unnecessary debt. You may need to take on debt to pay for college, buy a home or purchase your first car. But you should strive to avoid unnecessary debt. Yes, you might want a new wardrobe or a new TV. But will you be able to pay off the credit card bill when it arrives? Yes, you might want to remodel the kitchen. But how about saving up the necessary money rather than taking out that 401(k) loan?

10. Minimize insurance. If there’s a financial risk you can’t afford to shoulder on your own, it’s crucial to protect yourself with insurance. That said, you want to keep coverage to a minimum because money spent on insurance will usually be money lost.

Don’t have any financial dependents? Skip life insurance. Have $5,000 in emergency savings? Maybe you should opt for deductibles of that size on your auto, homeowner’s and health coverage. Have enough saved to pay long-term-care (LTC) costs out of pocket? Think twice before buying LTC insurance.

11. Maximize Social Security. Make a thoughtful decision about when to claim benefits, rather than simply applying as soon as you turn age 62 or as soon as you leave the workforce. To that end, you’ll need to consider factors like life expectancy, spousal benefits and family benefits. The upshot: You shouldn’t necessarily wait until age 70 to claim Social Security—though that’ll often be the best strategy.

12. Minimize fixed living costs. Our dollars get divvied up among four main buckets: fixed living costs like housing and car payments, discretionary “fun” spending, taxes and the savings we set aside. Want to have more money for discretionary spending and savings? Try to hold down your fixed living costs and carefully manage your annual tax bill.

13. Minimize possessions. We all need some possessions to lead a comfortable life and we all have some possessions that we treasure. But it’s the other stuff that’s the problem—the stuff that finds its way into the basement and, if it never leaves, ends up being a burden to our heirs. By contrast, money spent on experiences doesn’t turn into a burden. Instead, after an experience such as a concert, a meal out or a vacation, all that’s left is the memory—and, more often than not, it’s a fond one.

14. Minimize impulsive spending. There’s nothing wrong with spending—provided you buy stuff you truly want or need. The best way to avoid wasteful spending: Think long and hard before cracking open your wallet.

15. Maximize anticipation. An added reason to think long and hard: You’ll enjoy a lengthy period of eager anticipation—which may prove to be the most pleasurable part of any expenditure. Planning to buy a new car or take a vacation? Start thinking about these things far ahead of time, so you have months to savor your future spending.

16. Minimize hassles. When we imagine owning a boat or a second home, we tend to think only about how much fun it would be. But what about the hassles? After the initial thrill, the fun from such purchases will start to fade—and the hassles will likely loom large.

17. Minimize unhappy times. This isn’t just about avoiding purchases that come with significant hassles. It also means spending the least time possible commuting, doing disliked chores and with disagreeable people.

18. Minimize money worries. Rule No. 1 was to minimize cash. But that doesn’t mean you should hold no cash. If there’s money you’ll need to spend soon or will use to cover emergencies, it should be in cash investments. But holding cash also has another important role: If you want to reduce financial anxiety, a plump savings account can work wonders.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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