Check Again
Jonathan Clements | Dec 3, 2022
THE TWO-MINUTE CHECKUP is, I like to think, a unique financial tool: It aims to offer feedback across someone's entire financial life based on no more than nine pieces of information. That’s an ambitious goal and—perhaps no surprise—some users have found the calculator wanting. Meet Checkup 2.0. Sanjib Saha, who writes for HumbleDollar when he isn’t busy writing software, and I went through all the comments that the calculator had received and made a host of changes. Let me highlight three of them. First, we tweaked the “financial fitness” feedback. The original feedback compared users’ total savings to their earned income to see whether they were on track to have a big enough portfolio, as of age 65, to generate retirement income equal to half their salary. Some users didn’t take kindly to that feedback. Many folks noted that the Checkup didn’t take into account the pension they were entitled to, while others simply didn’t like being told they were behind when it came to retirement savings. To make the results more palatable, Sanjib and I changed the way they're presented. The idea remains the same: We’re looking at whether folks are on track to have enough retirement income as of age 65. But now, we simply tell folks what percentage of their current earned income they’ll likely have as of age 65, assuming they continue to accumulate retirement savings at the same rate they have in the past. Note that users only receive this feedback if they’re single and still in the workforce or, alternatively, if neither they nor their partner are retired. The second key change: We’ve allowed retirees to input their guaranteed income, such as Social Security, annuity income and pension income. Some users felt the calculator’s feedback was incomplete if this number wasn’t included. [xyz-ihs snippet="Holiday-Donate"]…
Read more » Safety Net: Questions
Jonathan Clements | Aug 10, 2017
WANT TO MAKE SURE your family is adequately protected against financial disaster? Try grappling with these 10 questions: What’s the minimum dollar amount you need each month to keep your household running? That’s a useful number to know if you’re forced to slash living costs because, say, you lost your job or you need to cover a large, unexpected medical bill. How would you cope financially if you were out of work for six months? Think about where you would get the money to cover household expenses—and whether you ought to cut living costs, build up your emergency fund and open a home-equity line of credit. If you’re retired, should you bother with a separate emergency fund? The big financial emergency is getting laid off—and that isn’t a risk once you’re retired. Who would suffer financially if you died tomorrow? If you’re single with no children at home, or you’re married to somebody with a healthy income, the answer may be no one. But if you’re the main breadwinner, with a spouse at home and young children, your death could wreak financial havoc—and you may need substantial amounts of life insurance. Do you own the right sort of life insurance? A majority of policies sold are cash-value policies, which involve hefty premiums—and which can crimp your ability to fund superior investment vehicles, such as your employer’s 401(k) plan. A better strategy: Max out your 401(k)—and protect your family with low-cost term insurance. Would your homeowner’s policy pay enough to allow you to rebuild? Rebuilding may prove surprisingly expensive, because your new home would need to meet current building codes. If you required nursing home care, how would you cover the cost? Can you afford to pay out of pocket, should you buy long-term-care insurance, or are you planning to deplete your assets…
Read more » Doing Better
Jonathan Clements | Jan 1, 2016
IT'S JANUARY 1—A DAY of great hope. Those New Year’s resolutions to save more still seem achievable. Nobody’s investment results have yet fallen behind the market averages. Market pundits can still fantasize that this year they’ll be proven right. In this spirit of optimism, check out my 16 ways to improve your life in 2016. Below, you’ll also find some thoughts on bond-market risk. 16 Ways to Improve Your Life in 2016 1. Give an unexpected gift. If you give your spouse or children birthday presents, you’re simply checking the box. But if you give them a gift out of the blue, they’ll be thrilled—and, in all likelihood, you too will be happier. Research suggests we get more pleasure from spending on others than spending on ourselves. 2. Lean against the wind. Whenever the broad market declines, train yourself to think less about the dent in your portfolio’s value—and more about the bargains that are now available. Like shoppers who rush to the department store whenever there’s a sale, you should be excited by falling share prices, not fearful. 3. Take the stairs. Or work out for an extra five minutes. Or take a walk after dinner. A marginal increase in the amount you exercise may be the tipping point that helps you shed weight and feel healthier. 4. Talk to your family about money. Of the four great taboo dinner party topics—religion, politics, sex and money—only money remains truly taboo. People are more likely to complain about their sex life than be honest about their portfolio’s lackluster performance. This year, go for truthfulness: Talk to your adult children about end-of-life decisions and how much they might inherit. Have a frank conversation with your spouse about how much you spend and save. Talk to your high school freshman about how…
Read more » Calculated Courage
Jonathan Clements | Oct 23, 2021
THE S&P 500 STOCKS are up roughly 100% since March 2020’s market low. I’m 100% clueless about how much longer this remarkable run will last. But I’m 100% confident that, when the next downturn comes, many investors will rush for the exit, fearful that their stock holdings will soon be worth little or nothing. Which brings me to one of the most important investment concepts: intrinsic value. No, intrinsic value isn’t a simple notion and, no, it can’t be calculated with any precision. Still, if we want to be more tenacious investors, I believe we should keep the idea front and center in our investment thinking. Count the cash. How do we calculate intrinsic value? Perhaps the most widely used technique is the dividend discount model. The idea is to figure out how much cash companies will return to shareholders in the years ahead through dividends and stock buybacks, and then calculate the value of that cash in today’s dollars. What about share price gains? Those are effectively captured by the calculation: When we sell a stock, we get the current share price, but we give up any further claim on cash paid out by the company. It might seem quaint to focus on cashflow to shareholders in an era when the S&P 500’s dividend yield is a tiny 1.3%. But the dividend discount model carries with it an important reminder: Almost all companies eventually disappear and, if history is any guide, a majority will deliver negative returns during their lifetime. The implication: Shareholders of many companies will collectively suffer share-price losses, but those losses can be partly or entirely offset—if these companies return cash to their investors before they shuffle off their mortal coil. The fleeting existence of most companies has been discussed by no less than Jeff Bezos, founder of…
Read more » Back to Fundamentals
Jonathan Clements | Oct 1, 2022
WHAT DO ALL BEAR markets have in common? By definition, stock prices must fall at least 20%. But often, that’s pretty much where the similarity ends. For instance, ponder the differences between 2020’s one-month, 34% plunge in the S&P 500 and this year’s grinding nine-month descent, which saw the S&P 500 yesterday close 25% below its early January high. The 2020 slump had folks fretting about the economic shutdown and possible deflation, while this year’s big worry is surging inflation amid a 53-year low in unemployment. Indeed, if you factor in this year’s loss to inflation, stock market investors have suffered a hit in 2022 that rivals that of early 2020. As inflation has accelerated in 2022, the yield on the benchmark 10-year Treasury note has jumped from 1.51% at year-end 2021 to 3.81% as of Friday. That’s meant double-digit losses for the broad bond market, leaving even conservative investors licking their wounds. By contrast, in early 2020, Treasurys rallied as stocks plunged, offering some solace to diversified investors. Every bear market is not only different from earlier declines, but also each one feels different—with unique issues that trick us into thinking the problems will snowball and the financial damage will be permanent. Such feelings aren’t surprising: If every bear market seemed similar, we’d all be emotionally prepared and there would be little or no panic. That raises the question: Have we seen any panic this time around? Market soothsayers look for it, saying share prices won’t bottom until we see “capitulation.” I have my doubts about such market “wisdom.” Still, we certainly had days in September when investors appeared to dump stocks indiscriminately, notably Sept. 13, when the Nasdaq Composite fell more than 5%. I find signs of indiscriminate selling encouraging because it means share prices may have become…
Read more » What’s Your Story?
Jonathan Clements | Aug 5, 2023
AS SOMEONE WHO HAS marched through life—and made money along the way—by putting one word in front of another, maybe it’s no great surprise that I’m a big fan of writing things down. My challenge to you: Follow the example of the 30 HumbleDollar writers who contributed essays to the book My Money Journey, and devote a few thousand words to detailing your financial journey, including your mistakes, triumphs and the lessons you learned along the way. For some, the writing will come easily, while for others it’ll be a daunting exercise. But either way, I think it’s worth the effort—because it can help us answer three crucial questions. What helped and what hurt our financial progress? Our recollections fade over time and our memories are often unreliable, so answering this question may be harder than it seems. Still, I believe it's instructive to look back and think about who and what influenced our financial journey. We’re talking about factors such as our parents, mentors, luck, health, hard work, skill and thrift. And there are, of course, times when the absence of such things likely set us back. Perhaps we suffered ill-health, or we got unlucky in our choice of employer, or we discovered we didn’t really know what we’re doing. My hunch: Those who have enjoyed a reasonable degree of financial success will find that the key contributors to their wealth weren’t big career breaks or a fabulous investment or two, but rather the prosaic business of collecting an income over three or four decades without too much interruption, and then regularly socking away a healthy chunk of that income. What do we value? An honest assessment of our financial life won’t just offer pointers on what we should or shouldn’t do in the years ahead. It’ll also tell us about…
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