This article is about Budgeting, Choices, Planning
This is a guest post by Christopher L. Jones, author of The Intelligent Portfolio. The following is an excerpt from his book.
During the meandering path of our lifetimes, there are many types of financial goals that we strive to reach. Some goals are short term in nature, such as having enough money to pay the taxes to Uncle Sam next quarter or paying for that trip to Hawaii next spring. Others might span decades of time, such as investing for the retirement of you and your spouse or partner.
Clearly the size of a goal matters, but there are other characteristics that have an impact on your investment plans as well. The objective with saving and investing is to accumulate sufficient assets over a period of time so that you can adequately fund a goal. When setting up an investment plan, there are a few considerations about goals that are important to evaluate.
One of the most important factors is how long you have to accumulate assets. The longer the time period, the less you have to save. Also, if the goal is far in the future (e.g., retirement), then you have more flexibility in the appropriate investment strategy. If the goal is short term in nature, your investment choices will typically be more limited.
Flexibility in time
Some financial goals have a rigid time horizon. For instance, your child may plan to go to college in four years, the summer after completing high school. In this situation, it is not easy to delay the need for the first year’s tuition and room and board (although you could take out a loan to defer the full cost).
For other goals, like retirement, the specific horizon may be inherently more flexible. As an example, you might choose to delay retirement by a year or two if markets perform particularly poorly. The point here is that goals with variable time horizons create additional flexibility for an appropriate investment strategy. If things don’t go as planned, you might be able to delay the goal to ultimately reach success.
Flexibility in size
For some financial goals, the amount of money I needed is known in advance and is fixed. For instance, maybe you need to make a property tax payment next April of $15,000. In this case, the tax assessor is not going to take $13,000 if markets happen to perform poorly. You need to come up with exactly $15,000 next April.
For other types of goals, the amount needed might be squishier. Perhaps you are saving money for the purchase of a vacation cabin in 5 years. You might like to have $100,000 to purchase the cabin of your dreams, but maybe you would be willing to settle for an $80,000 one a little farther away from the lake if markets don’t perform as well as expected.
For goals with less rigid funding requirements, you can accept more investment risk than for goals with very specific requirements. If markets don’t perform very well, then you have the option to reduce your expectations a bit. In many ways, this idea is similar to the flexible time horizon mentioned above.
Lump sum versus recurring
Another consideration is whether the money to fund the goal is needed all at once (lump sum), or whether it will be paid out over time. For instance, you typically don’t need to come up with the full cost of a four-year college education all on the first day of classes. The payments will be generally spread out over a four-year period. In effect, goals with recurring payments have a longer time horizon than lump sum goals, depending on the length of the period over which the payments occur.
Of course, retirement goals are a special class of recurring payments, since the length of time that you (and perhaps your spouse) will need retirement income depends on your lifespan. Since we don’t know when we are going to die, this creates the need for a string of income payments with an uncertain end date.
Keep in mind the idea that flexibility — either in terms of timing or the size of the goal itself — is an important consideration when selecting an appropriate savings and investment strategy.
This article is about Food, News, Shopping
“Look at this,” Kris said yesterday when she returned from grocery shopping. She held up two yogurt containers for me to see.
“So what?” I said. “Black cherry yogurt.”
“Look closer,” she said.
“That one’s smaller,” I said. “Did they change the container size?”
“Yes,” she said. “But they didn’t change the price.”
The incredible shrinking yogurt
I’ve received several e-mails lately from readers noting the same thing. They go to buy a product they’ve been using for years, only to discover that the container has shrunk. The price hasn’t changed — only the packaging. Reader David Cox, for example, wrote with the following anecdote that mirrors our own:
We went to the grocery last night and one of the items I wanted to get was yogurt. The store always seems to have their brand of yogurt on sale @ 10/$5.00. I was about to scoop up a bunch, when I noticed that they had redesigned the packaging with pretty new colors, but the package seemed a bit smaller. On closer examination, it was.
The new size was 6 oz. of yogurt, while the old style had been 8 oz. The price per package hadn’t changed, but the package now contained 25% less product. I thought it was very tricky of them to leave the big sales sticker on the shelf (10/$5.00!!!) just like we were used to seeing, without any thing to warn you of the repackaging. I guess they would claim it was obvious, but it still seems a bit tricky to me.
Is it tricky? I don’t know. I understand that manufacturers need to make a profit, but when they reduce the container size instead of raising the price, it does seem a little sneaky. It’s as if they’re unwilling to raise prices directly, so they take a circuitous route.
Standard operating procedure
I recently had a conversation with a friend who knows a great deal about this subject.
“You see marketing stories like this over and over,” Freeman told me. “Fabric softeners cut the sheets from 40 to 36 — same size box and same price. Ketchup switches from a glass bottle to a smaller plastic bottle and the price stays the same. Some companies mess with cap and lid sizes as a way to increase consumption. Want a bottle of laundry detergent to run out faster? Then increase the cap size slightly. (Many people use a capful per load.)”
Freeman then pointed out other ways companies subtly manipulate spending. “Think of the famous lather, rinse, repeat instructions on shampoo. Like you really need to do that. Same things happen with chips, cereal, and on and on. Just consider: maybe a box of cereal hasn’t gone up in price much in the past decade, but I guarantee you that the average box size has certainly decreased.”
Another friend, Jeffrey, chimed in: “I always wondered why, if the cost of packaging is so expensive, do cereal companies reduce the amount inside the box but the leave the size of the box alone?”
“They also do this with cereal bars,” Jeffrey said. “A while back, General Mills came out with Fiber One bars. The box is the same size as all the other boxes but there’s only five bars in the box, not the standard six bars that are in every other box. Nature Valley does the same thing with their family size box of granola bars. You open the box and only half of the box has product. It’s the same thing as lying but it’s disguised as ‘marketing’ so it’s okay.”
Again, I’m not sure it’s lying, but it’s obvious that shoppers don’t like to be duped this way. But both David’s e-mail and Jeffrey’s comments reveal they don’t appreciate being tricked. They’d rather have the same package size but see the price increase. I would, too.
Food inflation is a hot topic in the United States right now. I think we’re all beginning to realize that the things we love cost more. But some of us would rather pay the increased price than have manufacturers try to hide the inflation with packaging.
For more on this subject, take a look at Nickel’s thoughts on product packaging. He observes that suggested portion sizes are increasing even as package sizes are decreasing. You may also be interested to read about unit pricing in the GRS archives.
This article is about Choices, Investing, Retirement
“The Mole” is a certified financial planner and public accountant who, in his spare time, provides a behind-the-scenes view of the financial planning industry for Money magazine. In his most recent column, The Mole explains how to deal with a bad 401(k) plan.
“401(k) providers don’t actually care how they make money,” he writes, “just as long as they make a tidy profit.” The providers can make money by:
- Offering good choices to employees, but charging employers high administration fees.
- Charging low administration fees, but offering high-cost investment options to participants.
The Mole notes that smaller employers can’t afford to pay high administrative fees, so they may opt for something cheaper, not realizing that they’re simply shifting the cost to their employees. If your company offers a lousy 401(k) plan, the first thing to do is talk about it with your employer. If that’s not fruitful, The Mole recommends that you:
- Always taking the employer match. “I’ve seen some pretty pathetic 401(k) plans, but I’ve never seen one so bad where it made sense to pass on the [employer match].”
- Look into IRAs. If your company’s 401(k) plan doesn’t offer good choices, make funding your IRA a priority. A Roth IRA is an excellent way to save for retirement.
- Consider bonds. Bond funds tend to be less expensive than stock funds. If you have lousy 401(k) options, it may be a good place to hold the bond component of your portfolio.
- Favor index funds. Index funds have lower expense ratios than managed mutual funds. If the other funds in your plan are expensive, try to find an index fund with low fees. (I’m a fan of index funds in the first place, and think they should be one of the first places you look regardless.)
- Opt for a rollover. When you leave your employer, be sure to roll your 401(k) over into an IRA. “That’s the only way to get out of these really lousy selections,” writes The Mole.
I’ve never participated in a 401(k), but we have a similar retirement plan for the employees at the box factory. When we first set this up thirteen years ago, the plan was managed by Smith Barney, a large national brokerage. At that time, I would never have noticed that Smith Barney gave us lousy options. Our returns lagged way behind the market. Fortunatley, my cousin (who is the bookkeeper for the business) knew more about investing.
He discovered that Smith Barney not only offered us lousy investment options, but they churned our account — selling funds and buying new ones in order to generate transaction fees. He dumped them in a flash and has been managing the retirement accounts for the business ever since. Naturally, he has our money in low-cost Vanguard index funds.
Most people don’t have the option of seizing control of their retirement accounts like we did. For them, it’s best to follow The Mole’s advice when faced with a bad 401(k) plan.
[CNNMoney: How to deal with a bad 401(k) plan]
This article is about Entrepreneurship
My friend Nicole and her family visited our house for breakfast this morning. She and her husband are the founders of Green Ronin, a Seattle-based game publisher. As we enjoyed a couple lovely hours outside at the picnic table, we chatted about life and work. We talked about what it’s like to own a small business.
Because my father was a serial entrepreneur, I’ve spent most of my life around small businesses. Chris and Nicole have had a taste of the lifestyle over the past eight years. They’ve seen the bright spots and the dark, and have some strong opinions about entrepreneurship.
“What sort of advice do you have for somebody who might be starting a small business?” I asked. Here are the highlights of our conversation:
- Be wary of going into business with your friends. Though it sounds like a good idea, working with friends is often a recipe for disaster. “At the very least, partnerships with friends prevent you from being effective,” Nicole said. “You don’t say the things that should be said, or in the way that you should say them. You pull your punches.”
- Do your research. “I think it’s important to know what you’re getting into,” Chris said. “You can’t be successful by just jumping into an industry without having some idea of how it works. I didn’t just start publishing games, for example. I started by writing for somebody else. I had to learn about how a game company operates.”
- Start slowly. We all agreed that small business owners should move slowly. “We started Green Ronin in our spare time,” Nicole said. “Chris still has a full-time job outside the company.” By starting small, you’re able to control growth and focus on what’s important. Starting small also keeps things manageable. During my sixteen years working at the box factory, I saw all sorts of businesses come and go. Many of those that failed had tried to grow too quickly.
- Embrace guerilla marketing. “You can spend thousands of dollars on traditional marketing and see poor results,” Chris said. “We’ve placed big ads in magazines that just didn’t work. But it’s possible to spend much less on non-traditional approaches that get better results. For example, one way for us to introduce people to our products is to give away quick-start guides to our games at large conventions.” Think outside the box.
- Create boundaries. We began to discuss how much time our businesses take, and how I always seem to be working on Get Rich Slowly. “You need to create boundaries,” Nicole said. “A lot of people think that they can just work from home and enjoy a life of leisure. It doesn’t work that way. I wish I had better boundaries. My workspace is in a corner of the kitchen. It’s too easy to find myself answering e-mail at one in the morning.”
In the end, we all agreed that owning a small business offers advantages over a traditional job, but it also has its drawbacks. The best part, of course, is being involved with something you love on a daily basis. Unfortunately, that can be the worst part, too!
Here are some related posts from the archives:
- Quitting the day job: Finding the guts to pursue your dreams
- The incredible secret money machine
- Ask the readers: Advice for starting a new business?
This article is about Spare Change
“Are we a nation of financial illiterates?” asks Stephen J. Dubner over at the Freakonomics blog. Yes, he answers. And no. High school students are getting more economics education than ever before, yet their basic personal finance competency is dropping.
Dubner interviewed Annamaria Lusardi, a professor of economics at Dartmouth, about financial literacy. It’s an interesting conversation, but I think she misses the boat. What she believes are the important things for kids to know are meaningless to those who don’t understand the basics of personal finance. It’s the same dry stuff that turns people off from financial education already.
What would you teach high schoolers about financial literacy?
Meanwhile, Free Money Finance writes that his real estate agent has never met sane people before. “I had a conversation with our realtor,” he writes. “I told her that we were looking for a good house at a fair price (she agreed that our first offer was more than fair given the current market) and she said she just didn’t understand that. She told us that her other clients simply ‘found homes they loved’ and ‘would pay whatever it took to get into them.’” This is a great post.
“You must not have any pets,” somebody wrote to me recently. “You never write about them.” I have four cats, and would have more if Kris would let me. (Just call me the crazy cat man.) But because of either chance or adept “parenting”, they’ve never cost us too much money. Not everyone is so lucky. Andrea at Queercents takes a look at reducing pet costs, especially medical expenses. She provides an overview of various programs (such as pet insurance and preventative care) that can help reduce the cost of keeping your animals.
Finally, Bankrate has published their Safe & Sound ratings, which offer a quick way to determine the relative financial strength of your bank. Bank failures are uncommon in the United States, but with a couple of recent high-profile examples, people are worried. Safe & Sound offers depositors a chance to get some idea whether their bank is on solid ground. (Note: this tool seems of dubious use to me. What do you think?)
This article is about DIY, Food, Frugality
Though Kris and I live just a few miles from downtown Portland, we’re fortunate to have three-fifths of an acre of land. This allows us to set aside some large spaces to grow fruits, berries, herbs, flowers, and vegetables.
Not all city-dwellers are so fortunate. In fact, millions of people don’t have access to a yard at all. For some of these, container gardening may be an option. Others might consider community gardens or farm subscriptions.
One Portland organization is championing another way for city-dwellers to find fresh produce: urban fruit gleaning. The Portland Fruit Tree Project was created to salvage the fruit that might otherwise go to waste along the city streets. From the site:
We have an abundance of fruit growing on trees in residential areas of Portland. But every year, thousands of pounds of this delicious organic food drops without being harvested, turning into a sticky mess in yards and sidewalks. Meanwhile, many people living on low incomes have limited access to fresh fruit, vital to a healthy diet.
The Portland Fruit Tree Project organizes people in the Portland community to gather fruit before it falls, and make this valuable resource available to those who need it most.
Here’s a short video that demonstrates urban fruit gleaning in action:
If you live in the city, watch for trees in your neighborhood with fruits or nuts that go unharvested. If you’re brave enough to knock on a stranger’s door, you might just find yourself with access to free food.
For more information about gleaning and about finding fresh produce in the city, check out the following resources:
- University of Maine: Organizing a community garden [PDF] and Food for your community: Gleaning and sharing [PDF]
- Sprouts in the Sidewalk is a blog about urban agriculture
- Fallen Fruit is a site devoted to mapping free fruit in urban areas (particularly Los Angeles)
- Planting Milkwood: How to make a feral fruit map — a guide to mapping the available fruit in your area
- Guerilla Gardening encourages readers to reclaim neglected public urban spaces by planting flowers and crops
- City Farmer is all about urban agriculture: community gardens, container gardening, and more
Last week, we noticed that the neighbor’s cherry tree wasn’t being picked. Because she thought it would be a shame for that fruit to go to waste, Kris knocked on the door to ask if she could help herself. The neighbor agreed. In fact, it turned into a sort of community gathering as families from several homes gathered to climb ladders and gather the fresh fruit.
This article is about Odds and Ends, Self-Improvement
Last summer, Randy Pausch, a professor at Carnegie Mellon University, learned that the pancreatic cancer he was fighting had metastasized, and that he only had months to live. A few weeks later, he delivered his “last lecture”, a talk meant to impart the wisdom he’d gained during his lifetime.
Pausch’s presentation, entitled “Really Achieving Your Childhood Dreams” was a huge internet phenomenon, and was downloaded more than 10,000,000 times. Many Get Rich Slowly readers sent me links to the video. I watched it twice (and bought the book), but I never wrote about it. I’m not sure why not. It had a profound impact on me. It’s inspiring. It’s full of zest for life and praise for dreams.
If you haven’t watched this before, I urge you to do so now. And then go pursue some of your childhood dreams.
Rest in peace, Randy, and thank you.
This article is about Ask the Readers, Relationships
Money management can be difficult, even when you’re on your own. Throw a life partner into the mix and things get more complicated. What can you do if you and your spouse just aren’t on the same financial page? Hal recently wrote with a question:
I got married about a year ago to a wonderful girl who is up to her ears in debt, including medical bills and student loans (including federal loans) which have been in default for some time. I did know about this debt before we got married, and I knew it would be quite some time before we’d get her finances back on track.
Here is my issue: whenever I bring up anything financial, whether it’s repaying her loans or other past debts, saving money, setting a budget, etc., she gets very defensive and angry, and refuses to talk about it.
I manage our joint finances, but she has her own bank account that she is in control of, which she never talks about, other than to tell me there is no money in it. I accepted my wife’s financial situation when I married her, but it seems like she doesn’t want to change it.
Is there anything I can do to have an open dialogue with her about money matters without making her defensive?
This is a great question, not just for couples with joint finances, and not just for married couples, but for all couples everywhere. Continued financial conflict can place a severe strain on any relationship.
In January, I shared a guest post from Gather Little by Little, who wrote about how to stop fighting with your spouse about money. This article provides some good tips, though it doesn’t offer any solutions when your partner refuses to talk about money. The comments on that post contain feedback from some people who try to avoid the subject, and from people dealing with reluctant spouses. It seems there are plenty of couples in which one person isn’t willing to discuss money.
I read once that situations like this are sometimes caused by a perceived “lack of control”. The spending partner, or the partner who is unwilling to discuss finances, feels like they do not have control over their finances, nor the couple’s finances. One solution is to find a way to grant them more control.
In this case, Hal manages the couple’s joint finances. It may prove beneficial to include his wife more in the process, to allow her more decision-making power. (Of course, this may not work at all, but it sounds like a reasonable thing to try.)
Do you have experience with a similar situation? Have you been the spouse reluctant to talk about money? Have you been in a relationship in which you could not get your partner to deal with the subject? How did you handle it? What advice can you offer Hal? How can he get his wife to talk about money?
This article is about Administration
It’s been months since I did any public housekeeping. I have several items that could use some feedback, however. Now’s a good time to discuss them.
First of all, my RSS feed is in the process of being moved from the old Feedburner site to the new Google-based Feedburner site. There may be some glitches during this process. The subscriber number may swing wildly. (I’ve seen 51,000 and 62,000 today, and right now it doesn’t show at all.)
There may be trouble with the e-mail newsletter. Some bloggers report 150 copies of their e-mail being sent out this morning. My subscribers saw zero copies in their inboxes. I’d rather have the zero than the 150. Things should settle down as the team at Google works the glitches out of the system.
I used to share a lot of cool tools and sites I found as I poked around the internet reading about money. I’ve done that less in the past few months, largely because I’m inundated with e-mail from public relations firms pimping their articles and applications. I’m reluctant to post about something that I first heard about via a PR e-mail. It feels too close to selling content (which I choose not to do).
On the other hand, some of these look genuinely useful. Should I refrain from mentioning Qvisory simply because two PR people contacted me? I’m beginning to believe it doesn’t matter how I hear about cool money stuff — I should share it with you, anyhow. What do you think?
(On a side note: I just about died when a PR person contacted me today to give me info about the company I worked for in the story about the worst job I ever had. Uh, no thanks.)
I’ve mostly tried to refrain from covering topics that I’ve explored in the past. There are several articles about buying a new car in the archives, for example. However, most of these articles are months (or years) old. Get Rich Slowly has seen a lot of new readers since then, and most of them haven’t gone back through to look at the old articles.
It’s time to cover some of these topics again, and to do so, I’ll reuse certain key passages from old posts. (Why reinvent the wheel, right?) In an article about buying a new car, I might reuse a bullet-point list, for example, updating it with new information. If you have suggestions on how to approach “repeat” material, I’d love to hear them.
I haven’t monkeyed with the sidebar in nearly a year. It’s woefully out of date. I plan to make some changes to it soon, and I welcome your feedback. Are there features you’d like to see? Features you want removed? How many of you ever use the “recent comments” to track ongoing discussions? How would you feel about a weekly poll?
I’ve has a number of people write lately asking for my policy on guest posts. I’m happy to consider all submissions. I tend to post guest articles on “Wednesdays and weekends”. This isn’t a hard and fast rule, but I try to share two items from other writers every week.
If you have something to share about personal finance or productivity, feel free to send it to me. But please be warned I’m becoming much choosier lately. Guest posts must be well-written and informative. I’ve actually begun to reject submissions that will require too much editing on my part.
(Also, if you have favorite guest posts or guest authors from the past, please let me know. If there are some clear favorites, I’ll ask them if they’d like to contribute again.)
This seems like a good time to ask for reader requests, too. Are there topics you’d like to see covered? Topics you’re tired of hearing about? For example, one reader yesterday mentioned that my focus has been too much on rural stuff lately and not enough on city stuff. Excellent point, and one I’ll try to consider over the next few weeks.
Would you like to see more “ask the readers” columns? How do you feel about the current posting pace (which has remained essentially unchanged for eighteen months)? More daily links (or “twice weekly links”, as the case may be)? Fewer? More book reviews? Contests?
Also, I’ve had some people mention that the articles seem to be getting longer, and they’d prefer shorter posts. Thoughts?
Thanks, as always, to all the Get Rich Slowly readers. You folks are awesome. The discussions around here never cease to amaze me. I’ve learned a lot over the past two years, not just from my reading, but from your stories and advice. This site would not be what it is without your contributions. Thank you.
This article is about Books, Choices, Planning
Smart personal finance is all about balance.
You work while you’re young to provide for the day when you may not be able (or willing) to work any longer. If you don’t save enough, you may find yourself unable to lead the life you want in retirement.
But if you save too much when you’re young, you risk sacrificing years of youth and vigor for an uncertain future. In a worst case scenario, you may not even live long enough to enjoy the money you’ve saved.
The key is to find some sort of balance: to save enough for retirement, but to also use money to enjoy life while you can.
In his 1997 bestseller Die Broke, Stephen Pollan offered a controversial approach to retirement. Instead of focusing on the future, he encouraged readers to put as much emphasis on today as tomorrow. He offered a four step prescription for making the most of your money:
- Quit today. Use your job to generate income to pursue your personal goals rather than using the job itself to fulfill those goals.
- Pay cash. Live frugally. Wait to buy things until you can pay with cash.
- Don’t retire. Plan to be productive all your life. You’ll earn more money and be more satisfied.
- Die broke. Forget about leaving an estate. Use the money you’ve saved. Make the most of what you’ve earned.
“By choosing to die broke,” writes Pollan, “you turn the future from something to fear to something to embrace and rejoice over. Dying broke offers a way out of your current misery and into a place of joy and happiness.” His message is to enjoy tomorrow and today.
Spend ’til the End
In the newly-published Spend ’til the End, Scott Burns and Larry Kotlikoff offer similar advice, but they place more emphasis to the details. Burns and Kotlikoff analyze dozens of hypothetical scenarios as they seek to discover which choices provide the greatest “lifetime living standard per adult”.
The authors believe that in order to obtain a balance between today and tomorrow, you must:
- Maximize your spending power.
- Smooth your standard of living.
- Price your passion.
Burns and Kotlikoff draw on research into economics and behavioral finance. They cover big concepts and small, all while keeping the information accessible to the average reader. Most of all, they stress that you are just as capable as a financial professional to research and choose the best course for your life.
Maximize your spending power
To maximize your spending power, you must make the most of big life choices. Where will you live? What will you do for work? How much will you spend on a mortgage? How will you invest for retirement?
The authors suggest that it’s okay to choose a job that you love, but that you should be realistic about how much income you can generate. They also note that where you live can make a huge difference to your standard of living. Whether you should buy or rent is a complicated question, but if you do buy a home, Burns and Kotlikoff urge readers to prepay the mortgage. “Paying off your mortgage is one of the smartest and safest investments you can make,” they write.
Finally, the authors believe that the best way to maximize investment returns is to fire your broker and to invest the money yourself in low-cost index funds. (Their philosophy is very similar to that found in The Four Pillars of Investing, which I reviewed two weeks ago.)
Smooth your standard of living
It may not make sense for everyone to save for retirement. If your financial situation leaves you pinched, you should find a way to make your present circumstances more comfortable and then worry about the future. In fact, the authors note, for young people it sometimes makes sense to borrow. If done sensibly, borrowing money can help smooth your standard of living:
Consumption smoothing is a balancing act. It’s about balancing future and current spending, but it’s also about balancing safety with opportunity.
In economics-speak, consumption smoothing means maintaining a balanced standard of living over the course of your entire life.
- Rather than oversaving today to live rich tomorrow, consumption smoothing means giving yourself permission to enjoy today, as well.
- But it also means that instead of overspending today and being broke tomorrow, you recognize when it makes sense to save.
This is difficult to do, of course. There are many variables: income, life expectancy, unexpected emergencies. Much of Spend ’til the End is devoted to exploring specific techniques for consumption smoothing.
For example, the authors stress that diversification — not just of investments, but of all your economic resources — is crucial to maintaining a balanced lifetime standard of living. This is why it’s critical to not invest in your employer’s stock. It’s foolish to draw your paycheck and your investment income from the same source. It’s also the reason that many financial planners believe it’s good to have both a Roth IRA and a traditional IRA — it diversifies your retirement resources.
Consumption smoothing is all about providing a constant lifestyle.
Price your passions
Life is about more than money. Money helps ease the way, but it does not give us meaning. Instead, we derive pleasure from our passions: our relationships, our hobbies, our beliefs. But each of our passions carries a financial consequence.
In some cases — such as living with a partner — doing what we love can actually increase our standard of living. Because a couple can share expenses, living together is a financial net gain. It’s more difficult to evaluate our leisure activities:
We’re constantly trying to figure which is worth more: money or leisure. And guess what? Most people choose leisure. Even as the financial services industry puts out warning after warning tell us that we’re all going to be eating cat food unless we save and invest more money while working more years, any examination of the choices people age fifty-five and over make leads to only one conclusion: we like leisure more than we like money.
But, the authors argue, this isn’t necessarily a bad thing. If we’re able to pursue the things we love at a price we can afford, it’s worth it.
Spend ’til the End is primarily about little tweaks you can make to the way you manage your money in order to improve your lifetime standard of living. It’s about consumption smoothing. For example, there’s a short chapter on tax-efficient investing. This may seem like an esoteric topic, but optimizations like this make a difference to your future comfort. Much of the book’s advice is geared toward those nearing retirement, but there’s still plenty for readers of every age.
Spend ’til the End was the perfect book for me to read at this place in my life. Still, it’s not a great book. In fact, I had several problems with it:
- Some examples are too detailed, too specific.
- The book seems to lack cohesiveness. (Perhaps because there are two authors?)
- The writing style can be simultaneously glib and dry (no mean feat).
- Though I can’t say this about many books, this one seems poorly edited. The copy-editing is particularly poor.
The real problem is that many of the choices this book asks readers to make require intricate knowledge of tax code and an understanding of myriad variables. There’s no way for the average person to calculate these numbers by hand. Indeed, the authors rely heavily on a piece of software developed by Kotlikoff. ESPlanner can analyze these variables, and it’s used for many of the examples in the book. Because of this, Spend ’til the End occasionally reads like an advertisement for a piece of $150 retirement planning software.
I don’t want to sound too harsh. I like Spend ’til the End. It’s thought-provoking. And any personal finance book that name-drops Scrooge McDuck and The Big Lebowski is a winner with me.
I recently had a chance to spend a couple hours on the phone with Scott Burns, one of the authors of Spend ’til the End. Look for highlights from our conversation next Thursday.