Chance and Community Chest - Charity

When I was in college, whenever I had extra money, I’d fold up a bill into a little square, a $20 or a $5, and hide it in my wallet. When I was short on money, I would sometimes find my little cache which provided a nice bonus to tide me over to the next cash infusion. I still remember the rush of surprise finding that bill tucked deep into a corner of my wallet. Like past me had bequeathed future me a gift, for which I was always grateful. And I always tried to pay that money forward when I had it to the next impoverished me, as well as share with those around me when I could.

The gift economy was an important part of my college career. As I said earlier, my grandmother gave each of her grandchildren in college a small annual gift as spending money. She had gone to college in a time when it wasn’t common for women so she knew from experience how much that meant. I was always grateful, as I was for any gift certificates I received. My aunt, a librarian, usually gave me one to a favorite bookstore for my birthday. The four or five novels a year it allowed me to buy were invaluable to me.

Reading these essays, you might be under the mistaken impression that we think that we bootstrapped this all by ourselves. We did not. As I said in the first essay, we have been very fortunate. We have received gifts and inheritances. What we might have done differently than other people was that we put most of that found money to work rather than splurging on ourselves.

We didn’t create this little bubble universe we live in from whole cloth, but we did tailor it to our tastes.

When I was younger, I had the naïve philosophy, based on scattershot experience, that money would come to me when I needed it. Not when I wanted it, when I really needed it. I remember so many times in college having unforeseen gifts or bonuses or found money I’d squirreled away save me from a repair bill on my car or allowing me to pick up an extra book I didn’t know I needed for a class.

Oddly, while I believed in it, I never relied on it. I also had the firm New England Congregationalist philosophy that the gods help those who help themselves. I was never fully willing to commit my destiny to random chance though sometimes that random chance favored me.

And sometimes it didn’t. The Greeks were right: the gods are as capricious as a teenage girl shopping in the mall with a purse full of hand grenades.

But I also believed, and still do, that if you give back where you can, the universe is a little more likely to turn a kind eye upon you. Maybe that’s just some primitive, animistic sociology.

Over the years, we have contributed to charities, organizations and individuals. In the past few years, our gifts have gone directly to individuals in need to avoid the overhead of organized administration. Those have generally been special circumstances we don’t much discuss for a variety of reasons.

I’m not here to talk about that. You all have your favorite charities and ways you contribute to them that work for you.

If there is a theme to this series of essays so far, it is the proverb, “Waste not, want not.” I know, I’m supposed to be a writer. How utterly cliché.

For many people I’ve known, that proverb translates into hoarding everything they’ve collected in their lives and not being able to part with any of it because one day they might want it (“File it under ‘I’ for I might need that someday”). Most people I’ve met have a hard time letting physical items go. Cleaning out their closets is a struggle of blood, sweat, toil and tears, often quite literally. Somehow, they get bound up emotionally with the circumstances of how they acquired whatever it is they hold in their hands.

For whatever reason, I am not generally cursed with that psychic entanglement. Perhaps in part this comes back to my belief in the power of simplicity.

Other people I know incorporate that adage by selling any of their excess existential largesse secondhand. I would never advise against it for someone who needs the money and has the time. For us, and many others, that often just becomes an excuse to defer and delay. We have chosen a different path.

About twenty years ago, we noticed that our closets, cabinets and cupboards had gotten full, mostly with detritus we’d collected over the years. In Florida, we are not blessed with attics and basements to store life’s excess bounty, most of which we never looked at or used but somehow couldn’t part with.

Once upon a time, moving on a regular basis provided the perfect opportunity for winnowing. Often what we could carry with us was enforced by the size of the car we drove, the truck we could rent, or the number of friends we could feed to move it all with us. Once we nested in the same location for ten or more years, those enforced opportunities vanished. And the detritus accreted into a kind of historical sedimentary rock. In the deepest closets, it seemed to be on its way to metamorphizing.

For a long time, I’ve had the philosophy that I needed clear pathways to move through my home. My general rule is that I should be able to place my clenched fists against each other at my solar plexus and still be able to navigate the house without hitting my elbows, which for me is just about the width of an open doorway. As well, I’ve found my mind functions better when everything around me is neat, clear and organized.

Our clutter hadn’t yet overflowed into the walkways, though some furniture we’d acquired in our early post-college days was somewhat awkwardly placed.

So, over the course of a staycation, we went room by room, collecting all the things we no longer used. I took a brutal eye to everything I touched. Need, want, nice-to-have transformed into used frequently, rarely or not at all. Was anything worn, damaged or obsolete? Were the items with sentiment attached to them truly irreplaceable or just associated with well-worn memories that would never go away? Were we ever going to get around to that deferred project or repair? How many were impulse buys I never should have made?

Nothing in the house went untouched except the cats. And even their toy box got raided.

I became like Genghis Khan on a mission, slashing and burning everything in sight. My decisions were instantaneous and brutal. I entered a fugue state. By the time I reawakened, we’d filled up half a bay in the garage. Who knew we could stash away so much stuff in what wasn’t really an overly large house with a dearth of closets?

That stash sat in the garage for a bit while we decided what to do with it. A few items got hauled back in, a few others that had been on the fence went out. But 95% of it stayed exactly where it was.

In the end, we donated everything still functional to a no-kill pet shelter than ran a thrift store to fund its operations. Anything they wouldn’t take that was still useful went to Goodwill. The books, DVDs and CDs, we gave to the public library which runs their own bookstore to supplement their acquisition budget. Anything that wasn’t useful got set out at the curb. Some of it disappeared before the trash guys came around, either as metal recycling or someone else’s reclamation project.

The funny thing was, when we were done, we felt both exhausted yet lighter. When we walked around the house it was like the scales of our existence had fallen from our eyes. We noticed the things we’d kept and appreciated even more because there was less to clutter up our view. We quickly found didn’t need or miss the excess.

Now we do this every year. While we never filled up that large a space again, in the earlier years we generated more than we thought could still exist. Things we couldn’t part with one year were often easily let go the next. Our goal was to move out more than we brought in.

For us giving all those unwanted items to charity made it easier as we could envision our island of misfit toys making someone else a little happier and benefiting an organization we believed in along the way. Win-win-win.

That belief and visualization meant we could clear out faster, let more go and move on with our lives while hauling around less baggage. Like a caged bird scenario, I sometimes believe that if the universe really wants me to have something, it will come back to me. I know that sounds a little metaphysical, but it works for me. In the intervening time, 99% of what we let go, I haven’t missed. Of the hundreds of items I’ve given away, I can count on one hand the ones I remember and regret.

There’s an interesting psychological principle at work here. People, in general, feel better with less clutter. In both children and adults, studies have shown that the fewer choices an individual has when making a decision, the happier they are. Fewer, not none (3-7 is optimal). Too many choices, whether in entertainment or available flavors of jam, tend to paralyze us in indecision rather than liberate us.

Of course, there is also an evolutionary principle pitted against that. Most people can’t let things go because they are convinced that they might want them again in the future and not be able to find them. We are wired not to pass up resources even if we don’t need them at the moment.

For most people, finding the balance can be difficult. I am probably blessed in that, for me, it’s not. I often ask myself, how many pairs of shoes can I wear? How many dress shirts do I need? How many cars can I drive? The list goes on. I find it to be a useful exercise.

Uncluttering our lives meant we could more easily see our goal. We could rule our stuff rather than our stuff ruling us. Simplicity multiplied in having less maintenance to do on existing items, along with less stress over doing it or losing them. And less cleaning. All of which freed up more time to do the things we wanted or thought were important. It also freed up living space. Donating our excess to charity paid dividends for us. It was always an integral part of the process.

Give back in ways large and small and the universe will give back to you. I fundamentally believe that no matter how it strange it sounds. Some of that reflects back to the Three Treasures of Taoism: Charity, Simplicity and Humility.

Some of this philosophy has extended down to my writing career.

Back in the 90s, I frequented a Taoist internet forum. I have been fascinated with the philosophy since college and enjoyed reading insights and interacting with similar people there for years.

Slowly but inevitably, the site became unstable. Christian evangelicals decided to colonize our forum from their sister site, first under the auspices of understanding which quickly transformed into proselytization and finally into open warfare. In case you don’t know many Taoists and Zen Buddhists (who preferred our company to the predominately Theravada Buddhists who frequented their forum), this is a neat trick to pull off. Somehow, we allowed it to happen.

Anyway, sometime after 9/11, the individual who ran the forum shut it down, due to those and other issues. A couple daughter sites sprang up run by former members. I frequented one of those for a little while. There I ended up in a discussion with a woman I didn’t know about creative works and people who were poor.

At the time, the music sharing controversy was still running at full steam. The free economy hadn’t yet transformed into the gig economy in the wake of the Great Recession. The mantra that information wants to be free had just begun to echo, along with all the implications of that on anyone who held a copyright (which were seen in these circles as the stamp of ownership by the corporate beast).

Which was pretty much the direction I saw this conversation headed as it unfolded, which didn’t sit well with me.

I’ve known people who make their living from the sweat of their creativity. Not the big, splashy names that in music had the backing of major labels, but smaller indie names most people had never heard of. People who write their own songs, print and market their own CDs, setup and tear down their own equipment and loaded it into the van they drive to the next gig themselves. People who if they sold a thousand CDs at an appearance were having a really good night. People with mortgages and bills to pay, struggling to keep a fingerhold on the lowest ledge of the middle class. People who earned their money.

The equivalent description applies to the vast majority of writers I’ve met, most of whom will never be Stephen King.

Anyway, I got the sense that this woman was mostly self-rationalizing her own behavior of taking works to enjoy rather than paying the artist their due so they could keep creating (like many others I’ve met). And I said as much.

But still, I listened. Because, as I mentioned in other essays, I’ve known people who lived in poverty. I have more than an inkling of what their lives can be like.

And something in that conversation must have resonated. Because just after I started Noddfa Imaginings, when the Great Recession struck, I decided that I would give back to people by not charging them to read what I created. By then, I easily could have, at least the better stories. Self-publishing was not a difficult process. It still isn’t.

I’ve known the numbers of this business since the beginning. When I left engineering, the average advance on a first science fiction novel was $2-3k. A novel generally takes a year to write. You can do the math. And that was before the publishing industry started into full collapse, though it’s stabilized to some extent since. 

I’ve told people all along that getting published, while a nice indicator of success, wasn’t essential for me. I didn’t need the money. This decision seemed like a natural extension of that principle at the time.

Even as the economy has recovered, I haven’t gone back on it, though I do sometimes reconsider. Perhaps that just means I am still looking for some external validation. Most writers or creative types aren’t in that position. There is a persuasive argument to be made that giving away works for free devalues not just the works but the artists. Though I suspect art endures not for payment but for its own sake. At the same time, it’s nice to be able to eat. The starving artist stereotype is a trope that’s been way overplayed.

Setting up a lifestyle where I could afford to make that decision started with living debt-free by paying off the house. I understood the implications of compound interest, both positive and negative depending on which side of the equation we were on.

I am guessing some of you are wondering how any of this essay relates to the others. That’s easy. There is a point when enough is enough. I don’t need more stuff I’ll never use. Which means I don’t need a bigger house to store it all in, or a bigger car to haul it all around. Which means I don’t need a high paying job to maintain it all.

As well, for me, it was always about remembering the initial goal, not fixating on the process. Our goal was financial independence, living a dream and retiring early so we could do the things we enjoy. Which has never been to have bigger, better or shinier toys than anyone else. It was never about having more. It was never a contest or a race.

As I’ve said, I don’t spend as much time managing our finances as people might think. I could spend a great deal more time min-max each decision and investment for the highest return. I’m not sure what the purpose of that would be. My goal was to be a writer (“Dammit, Jim, I’m a wordsmith, not a hedge fund manager!”). But I do have an affinity for numbers and a certain intuitive predisposition to working them.

One final story. When we made an offer on the house, I already had a handle on the compound interest tables I’ve mentioned. We really wanted the house, but it fell just outside our price range. We knew it had been on the market for a while and had dropped in price once or twice because the housing market had softened. So, I ran some numbers and came up with a strategy.

First, I looked at what the owners had paid for the house five years earlier, which was in the paperwork of the listing. I subtracted off a 10% down payment, which was standard at the time. Knowing roughly what the interest rates were five years before, I calculated what they still owed. I then added in a rough estimate of their selling commissions and fees, and compared that number to what they were asking which was significantly more. I took the difference, subtracted it off of what they needed to break even and said that should be our offer.

Karen was dubious about my strategy. She really, really wanted this house. So did I. But once I explained the numbers and the psychology to her, she agreed to go along. We submitted our offer and gave them 24 hours to reply, knowing full well it would be rejected. But we didn’t want to give them time to think.

I was counting on, and received, a counter-offer, also with a 24-hour ticking clock. What I anticipated was a back and forth that would end somewhere south of the asking price, hopefully near the midpoint. What I got was a final price with a caveat that it was take-or-leave. The number? Within $1000 of the exact number I’d calculated they needed to break even. We didn’t pause when we heard it, just said we’d take it which I think surprised everyone involved.

As I said at near the beginning, knowledge is power. That calculation shaved roughly 12% off the asking price, putting it back on the border of our initial budget. After all these essays, that number should ring a bell. I’ll leave it as an exercise for the reader to determine how much interest that might have saved had we paid the mortgage to completion. Of course, we took a risk, but that risk rested on solid calculations and psychology. It paid off.

And if it hadn’t? I’m sure we would have found another house, one we’d be just as happy with today.

I know I am fortunate. I have always been goal-oriented. A disciplined mindset is a part of my personality. Because of my engineering background, things like tracking expenses in a backward-looking budget come naturally to me. I was exposed to the people who could explain the power of compound interest and the power of paying down debt. My experience told me to never pass up an opportunity or a discount, at least a real one. Planning and organizing are second nature, as is trying to repair or maintain what I have. Spotting opportunities in the market is mostly intuitive. Letting go of things so that others may benefit from them does not cause me existential pain.

I was doubly-fortunate that I had a spouse who encouraged me and was willing to follow where I led even when our lives became uncertain, knowing all this experience gives us a huge leg up now that she’s retired. We’ve been through all the major decisions and planning sequences before, though not all the variations and subtleties on the theme. And we’ve picked up a few tricks and tips in case things slip sideways.

Hopefully, now, you have, too.

I started this process with a goal. I wanted to become a writer. But my overdeveloped sense of responsibility said I couldn’t just dive into the pond without mapping out the waters. So, I came up with a plan. I crafted a budget and tested it against the way we live. I adapted my mindset. I paid off my debts. I changed my lifestyle, my accustomed manner of living. I invested, not just for my future but for our futures. And with perhaps an equal mixture of skill and luck, it paid long-term dividends, some of which should last for the foreseeable future.

Planning, patience, simplicity and discipline. For us, that’s what financial independence is all about. It’s how I’ve been able to live the dream of writing for over twenty years.

Now, some of you might be thinking that I benefited from all this more than Karen. After all, writing was my dream, not hers. She was the one still working.

A few points to consider. First, this was always a path she encouraged me to take, sometimes quite vigorously before we even had a plan. Second, it was my excess salary, which until quite recently was still higher than hers, that put us in this position. Third, as I said early on, ideally before executing this plan, I would have found another job in engineering elsewhere in the country, likely in the Pacific NW. She didn’t want to leave her job here or move that far. And finally, while we make joint decisions, it is my planning, research and financial stewardship that sees us through each year.

When Karen had the opportunity to retire early last year, she chose not to take it because she still enjoyed her job. Her longstanding dream was to be a geologist studying hurricanes and coastlines with the USGS. Sometime between then and now, that changed. She retired in August after 30 years of Federal service that she likely wouldn’t have reached had I stayed in engineering. The locations of my best jobs and hers didn’t coincide. She got to live her dream, too.

In short, we have both contributed to and benefited from this path. Your mileage may vary.

But the reality is this: Many people with different talents, proclivities and predispositions can do what we’ve done. Some of you already have, perhaps even better. I would never say ours is the only way or even the best way. It is just one way. Many paths, one mountain.

Which brings me full circle to something I said in the very first essay. Part of the reason I wrote this series was to give back, or perhaps to pay my good fortune forward like that folded bill tucked inside my wallet. If anything in these essays helps even one person get a single step closer to their dream or goal, that’s reward enough for me. But all I can do is help and maybe guide through example. The rest is up to you.

The thousand-mile road begins beneath your feet. Godspeed and safe journey.

© 2019 Edward P. Morgan III

Seeds of Change - Investments

Ok, you’ve slogged your way through the preliminaries and the warm-up bands. Now it’s time for the headline act. This is the one I suspect you’ve all been waiting for. I hope you have your cross-trainers on, or a comfortable pair of hiking boots, because we’ve got a lot of ground to cover.

But first, it’s story time again.

Let’s set the Wayback Machine for just a decade ago. It’s the darkest days of the Great Recession. The market has fallen off a cliff. Money markets almost broke the buck, which most people didn’t know. No one knew if the banks would completely unwind as they had nearly 80 years before. Many were content to let it happen with no idea what that would mean. Fear was the dominant animal spirit prowling the trading pits, preying on the weak and leaving their blood pooled upon the exchange floor as a warning to others.

I remember the day in 2008 when the Dow Industrial Average dropped 777 points. I turned to Karen at dinner and said, now’s the time to get out, wait for the bottom, jump back in and make some money. Because no one knew where it was going or how long it would last, she preferred to ride it out like most experts always advise (generally good advice). We make joint decisions, so we sat. And we knew we’d still be buying in through her 401k all the way down so wouldn’t completely miss the opportunity.

But as the carnage continued, I started getting edgy.

I’d been investing since we first got married. As I mentioned in a previous essay, for a long time we’ve contributed to various retirement accounts, both 401ks and IRAs. But we also had a side account that I alone managed where we’d dumped some of my excess money from when I was still an engineer. It, like everything else, had hemorrhaged roughly half its value.

As I listened to the debate on Too-Big-to-Fail raging through the halls of power, I spotted a potential opportunity. I marked the three Big Banks on a watch list. I identified stocks we owned that I could sell, ones I didn’t think would bounce back quickly, mainly consumer companies.

Then came the day CitiBank fell below $1 a share while the normally fiscally responsible party seemed content to let it (and the economy) fail just to damage their political rivals. It felt like the world was ending. Everything was unravelling.

But I suspected there was money to be made.

So, I pulled the trigger. I cashed out some investments in that side account and dumped it all into Citi, placing a heavy bet that sanity would return.  It took a long, sleepless, panic-fueled month, but reason finally prevailed. Fairly quickly, my little side bet jumped to three times what I’d bought it for.

I cashed out, knowing it wouldn’t last, but I didn’t stop there. I’d already identified a couple Dow stocks with price-to-earnings ratios (P/Es) down around 8 (the historic average for the S&P is around 13). So, I immediately dumped the proceeds into them. A year later, those investments were up another 30%. In a year my initial investment was now worth four times what I’d started with. Pretty neat.

I continued making changes as I spotted opportunities, desperately trying to make up our loss. Our potential reversal from 2007 was still fresh in my mind, as it would be until we were five years out.

So where did all that get us?

Well, from the depth of the Great Recession to a year or so ago, the S&P 500 was roughly 3.5 times higher than its market bottom. Karen’s 401k paralleled that (so not a bad choice on her part to hang tight). Our IRAs were slightly less because we’ve been slightly more defensive with them.

And my side account? It was worth 7 times what it was when I placed that little bet. So if you were wondering whether I’m qualified to write about this, I’ll let that serve as my resume.

But once again, I’ll invoke my mantra. I am NOT a trained professional, so DO NOT attempt this at home.

What I am is an empiricist, and likely an extremely lucky one.

Our accounts divide into three unequal pots, each managed by a different guiding principle. Pot 1 is Karen’s 401k equivalent. That gets managed by a philosophy of indexing and compound interest. Pot 2 is our IRAs (including my 401k rollover). That gets managed by our financial guy who is a trained professional. Pot 3 is my side account, stocks and mutual funds. I’m its financial guardian.

Each year, I evaluate which philosophy has performed better. And I’ll probably be content to gather data for a long time to come. To me, it’s just amusing to see how it plays out. Yes, I have a strange sense of humor.

Let’s start with Pot 2 because I think it is the least instructive.

We are on our third financial guy. The first came highly recommended, a reputation that seemed to be borne out until he lost his assistant and a number of mistakes and oversights began to appear. So, we transferred our accounts to financial guy number 2, who was also recommended and closer to home. We could have sit-down conversations with him instead of just talking over the phone. As he prepared to retire, he transitioned us to financial guy number 3. We’ve had him for over a decade. We sit-down with him once or twice a year.

Financial guys are good and bad. Good in that they know more about the markets and various investment schema than I ever will. Bad in that sometimes they push things I don’t fully understand. My general rule is that if I don’t understand it, I don’t invest in it no matter how much money there is to be made. That comes from experience. While we’ve never gotten involved in anything particularly sketchy or Madoff level too-good-to-be-true, we have occasionally had some extra icing layered on our cake. Those empty calories haven’t always worked out, though fortunately those pieces were small. So now I take a firmer hand and do more self-direction. But our current financial guy likes a balanced approach so I always listen to his advice. He’s still in the race.

Now Pot 1 is pretty boring. In investments, that’s a good thing.

Remember way back in the first essay when I talked about average S&P returns? Of course, you do because I haven’t stopped harping on them since.

In a couple previous essays, I touched on the power of compound interest but haven’t formally called it out. Compound interest is my bestest friend. It’s my soulmate. It’s the kumquat Haagen-Dazs to my Kareem Abdul-Jabbar.

I’ve pointed out that the power of compound interest has been the workhorse of our financial plan and execution, making time and money work for us. You have seen how this has paid off in the way we paid our mortgage down. And again, when I mentioned how much money a small annual tax credit could add up to over time. It really is the key to the F.I.R.E movement.

Here’s a little rule of thumb to help you remember how it works. I learned it as the Rule of 7/10, (aka the Rule of 72).

Basically, if you take an initial chunk of money, say $1000, and invest it at 10% (the average S&P 500 returns) it will double every 7 years. You can work this out on a calculator. Enter 1000, multiply it by 1.1 seven times. What do you get? You should get 1948.72 (or just under $2k). Now clear that, enter 1000 and multiply it by 1.07 ten times. You should get 1967.15 (or again, just under $2k).

So, it works both ways. If I want to double our money, I should invest it at a 10% interest rate for seven years, or at a 7% interest rate for ten years. It really is that simple.

Ok, but it’s not. Because I’ve been lying to you all along. That 10% return rate on the S&P 500? Yeah, as I’ve alluded to before, it’s not really 10%. It is on paper (so be careful with that axe, Eugene). But capturing those paper gains is somewhat of a chimera.

Why?

First, because even most S&P 500 index funds have management fees (or sales charges and commissions, or a few other hidden gems). Finding one with a 1% overhead is pretty good (you can find better in exchange traded funds, ETF, but 1% in mutual funds is the standard). So now our 10% (really 9.8%) is down to 9%.

Next up is the big bear: Inflation. For those who don’t know, inflation means your money won’t be worth as much in the future as it is right now for a variety of reasons that I won’t get into. But remember when you were a kid and candy bars cost $0.25 in a convenience store? Well, I do. And they were huge. Now they cost, what, $1.25? Ok, I don’t know how much they cost but a lot more at any rate. The same candy bar or smaller, likely made from the same or cheaper ingredients on the same machinery. That’s inflation.

Over the past hundred years in the US, inflation has run at roughly 3% a year (3.22% from 1913-2014). 3% doesn’t seem like all that much until you multiply it out like we did above and come up with something like 20 times what you started at (3.22% nets you 22.75 times over that 100 years). Which means that’s how much more money you would have needed to start with 100 years ago to have the same theoretical buying power now. It does get more complicated than that, but it’s a good working number.

Inflation is a beast.

Thankfully, for the past decade inflation in the US has only run at 2%. Though interest rates have also been at historic lows, too, which is good or bad depending on whether you are borrowing or saving. But I also remember when inflation hit double digits in the 80s (14.5%), when interest rates were also double digit (11%). I always work with the average for planning purposes and hope for the best.

What does that mean? Well, it means I have to slice off another 3% from our theoretical returns just to keep afloat with the same spending power, leaving me now with 6% returns. Just under the easy rule of 7/10, and more like 12 years to effectively double which is almost, but not quite, double the 7 years we started at.

And that’s before paying any capital gains (taxes) which we may or may not owe depending on our income and situation at the time we cash them out.

Now you begin to see where all those little matching funds and tax advantages come into play. Daddy’s little helper. That and a lot of cognac.

And yet, there is still almost no better game in town than an S&P 500 index. In Pot 1, we have access to other index funds (a small-cap index, a corporate bond index, an international index and a safe government bond index), all of which have extremely low management fees. As well, there are lifecycle funds that balance all those different indexes based on how far we are from retirement.

As a very quick rule of thumb and aside, it used to be that financial experts recommended you have your decade of age stashed in bonds or other safe investments. In your fifties, that would be 50% of your funds in bonds. I’ve seen a number of variations on this rule, more and less aggressive depending on your timeline, assets and risk tolerance, as well as different mixes that include real estate, international and value funds. More recently, I’ve seen an interesting scheme where keeping a 60/40 split between stocks and bonds and rebalancing annually might be the best to keep afloat and limit any downside carnage. I have to look into that more.

In essence, the closer you are to retirement, the more conservative you want to be. As we’ll get to in a moment.

We generally buy a mix of S&P, Small-Cap and International every paycheck (in that weighted order), though sometimes we park a significant percentage in the safe bond fund to preserve what we have. The buy strategy provides us cost averaging, meaning when the market dips, we get funds cheaper, and when it’s high, they are move expensive, which tends to average out throughout the year without us having to think about it. We tend to want to control how much or how little is at risk at any given moment through how much we park in the safe bond fund, though many people we know use the lifecycle funds to do that so they don’t have to think about it (which I recommend). Different criteria.

On to Pot 3. Daddy’s playground.

You got a taste of what I tend to do above. I am not above taking calculated risk. That’s because the purpose of this pot is a little different than the other two. But more on that in a minute. 

In general, I am a value shopper. I look for opportunities based on stocks (or assets) that are beaten down. I am not really good at spotting trends like an online friend who I sometimes trade ideas with. She has her finger on the pulse of society and is in tune with where it’s going in a way that I’m just not good at.

What I am better at is spotting opportunity. In general, I follow Warren Buffett’s advice: When others are fearful, be greedy; when they are greedy, be fearful. I’ll give you a few quick examples. Often, they involve stocks that are getting beaten down in the news cycle or ones that have fallen out of favor.

The first example goes back to the nadir of the Great Recession. I started thinking through what the long-term consequences might be. One was that consumers would likely become more frugal. Which meant they were more likely to buy and sell secondhand. I figured eBay might be a good pickup. I already owned some eBay, so I knew a little about their business. They had three prongs. First, the auction site. Second, an app called Skype which was supposed to support the auction site, but they could never make work. And third, a little payment outfit called PayPal, which drove more profit than the auction site and they eventually spun off. I knew that last one folded into the long-term trend of internet economy. eBay was beaten down at the time like most consumer stocks. While eBay has only doubled in value since the Great Recession, the PayPal spinoff is now worth eleven times what it started at from the spinoff. A tidy profit.

A better example might be from just over two years ago. After the 2016 election, all the FAANG stocks started taking a beating (Facebook, Apple, Amazon, Netflix, Google/Alphabet). Most of their CEOs had made an enemy in the President-elect intentionally or not. Their stocks plummeted. I believed they were oversold because the incoming administration had very little influence over their businesses, so near the bottom, I picked them up. In the intervening two years, they are up an average of over 70%. That beat the market average significantly, even after the carnage late last year.

Now just like I’m a value shopper, I also pretty much stick to a buy and hold philosophy. Which means I don’t turn over stocks frequently. I prefer to hold them and let them grow. Sometimes this works out, sometimes not. With a little company called Skyworks (which bought up a company called Alpha Industries which I’d bought in 2001), this has definitely worked out (to the tune of nearly twenty times return on investment). Not getting out of GE at its peak (not knowing they were lying in their accounting), cost me though I still walked away with profit. Not so with Carbo Ceramics which followed oil prices through their spontaneous boom and surprise collapse, though I didn’t lose much either.

In general, I’ve been fortunate in that technology stocks have led the way for the bulk of my investment career. Technology is something I understand, so it’s easier for me to see its implications. One of the reasons I picked up GE (aside from its low P/E, which is often but not always a good marker of value) was that it had captured a great deal of the market on wind turbines, like 70%. Even in 2009, I could see a future in alternative energy. I’ve considered Tesla if only for its battery tech, but Elon Musk is bat-shit crazy.

You get the picture. Basically, in this account I played to my strengths and background, and got lucky that it paid off over time. Though the initial learning curve to get there was at times pretty steep (which is why I don’t recommend it).

Ok, three pots of money. Each of them with a different philosophy and a different purpose.

The purpose of Pot 1 (Karen’s 401k) is to provide long-term income through our retirement. The purpose of Pot 2 (IRAs) is to bridge us from initial retirement to claiming Social Security. And Pot 3 (stocks and mutual) is a combination of bridge money, emergency money (ala 2007) and fun money in retirement. Because Pot 2 is the slow runner of the group with the highest fees, it will get tapped first.

Somewhere in here, we may have lost sight of the plot. The goal has always been financial independence and early retirement. But what does that even mean?

It means having enough money to do what we want when we want to. How much is that? Well it’s different for every person. You can find all manner of advice on that online.

But here’s where all the tedious accounting you’ve slogged through in the past bunch of essays begins to come together. Because we have a budget, we know exactly what how much money we are living on right now, not just a snapshot, a long-term, running average. Because we live debt-free, that average is well below our means, which has fueled the three accounts above. Because we have a disciplined mindset and live simply, we don’t need as much as others and can likely enjoy our current standard of living indefinitely. Because we’ve planned, we are hedged against uncertainty with both insurance and emergency funds. And should a deeper uncertainty arise, we can find other discounts and reductions if we have to. As well, we have an emergency maintenance fund for the house, and the house itself as a double-emergency fund should we need it.

But hopefully we won’t.

Because we’ve gone through the budgeting process once again, only this time looking forward rather than back.

We know from our Social Security statements what our benefits will be at various ages we might claim them. In general, we intend to defer claiming our benefits until the latest possible date because the government gives us an 8% bonus for each of three years past our full retirement date that we do so. Always take the free stuff.

We are also both very lucky in that our jobs had pensions. Karen’s is better than mine. We know what those benefits are and when they come online. We also will have access to her health insurance at the same premiums she would pay as an employee.

Now once we add all that up, then subtract off our expenses (which I’ve expanded to cover things like taxes and insurance premiums which aren’t accounted for automatically in retirement), I find we are completely covered. In fact, we’ll likely get a raise. And maybe a travel fund if we have anything left over.

Which only leaves getting from here to there now that Karen has retired early. Here is where the above accounts come into play.

Remember back in the first essay, I mentioned additional healthcare costs in retirement? That’s what Pot 1 is mostly dedicated to. It could be a little, it could be a lot. There’s no way to know exactly how or when the dice will fall.

Pot 2 (IRAs), as I said above, is bridge money. Unfortunately, that bridge money can’t be touched (without a lot of hassle or penalty) until the owner is 59.5. That’s still a few years away.

Which is where Pot 3 (stocks and mutual funds) comes into play. I can withdraw from that freely as long as I’m willing to pay the capital gains (taxes) which really isn’t much right now for people like us because, as I’ve said, we don’t make a lot of money.  Fair or unfair, it’s the way the cards lay out.

None of which answers how much we really need. So, it’s time for another rule. The 4% Rule (aka The Bergen Rule). That basically says you can withdraw 4% from a pot of money each year (adjusted for inflation) and have a great chance that your money will outlive you. So basically, in an average year, we need a 7% return to make it work. Tough but doable.

Given that again, we know our expenses (with or without any supplemental income depending on the scenario), all we need is roughly 25 times whatever that income gap is each year (1/.04). Which Pot 2 and Pot 3 cover from now until various other guaranteed income comes online (like Social Security). In fairness, there’s a bit of a spreadsheet that goes with all this, but you get the drift.

But all of this comes with a really big, huge, caveat. Order of Returns.

You can tell by the caps this one is important.

Ok, in an average year you know by now the S&P returns 10%. But you also know there is no such thing as an average year. The thing is, the timing of those down years can be really important.

I don’t have numbers handy, but let’s play a little thought experiment. Let’s say I add up my Soc. Sec. and my pension (lucky me) and then deduct my expenses and find I have a $10k annual gap. Ok, no problem. By the 4% Rule, I know I need to have $250k prepared to earn 7% a year (likely in some combination of stocks and bonds). But I’ve planned and saved and overengineered so, lucky me again, I have $300k eager to go to work. And I retire…

…in July 2008. Right on the cusp of the Great Recession.

By July 2009, my $300k suffered a drive-by, though not quite as bad as the S&P because I diversified. Which means I only lost a little less than a third rather than over half. Which means at the end of my first year of retirement, I now only have $200k. Which is less than the $250k I need to generate the income to fill the annual gap. In fact, it leaves me with a $2k/year shortfall if I withdraw at safe returns. I either need to cut my expenses, find a new source of income, or take greater risks with my investments.

And if I’d started with less and lost more? Potential nightmare scenario.

In an alternate scenario where the year before I’m going to retire, the Great Recession hits, I could likely delay retirement, save a little more and let my investments recover before I pull the trigger.

In another alternate scenario, let’s say for the first nine years of my retirement, my investment beat the returns they need by 4%, then give back that 40% (so an average wash). By the time the crisis hit, I would have $427k in my account (compound interest) which then gets chopped to $256k after the carnage. Hey, as long as I had let that extra money sit, I’m still afloat, with a tiny amount of room to spare.

Long story short, when the professionals have run through both theoretical and real-world scenarios, they find that once a retiree falls below that line of what they need in annual income, they don’t tend to recover. Which means many outlive their money instead of their money outliving them.

Order of returns matters.

To mitigate that, experts recommend that you maintain 2-3 years of reserves in cash (or very liquid assets with guaranteed resale value, i.e. savings bonds not 10-year Treasury bonds) to cover your expenses. In our case, that would be the gap between Karen’s pension (and supplemental) and our expenses. That theoretical $10k in the example above. On average, when a bear market (a 20%+ decline) lasts 18 months to 2 year before it recovers to its previous levels. Three years gives you a cushion. Which might be a little less if you reinvest any dividends (which would be bought at a reduced price). What all that means in practice is that you don’t have to sell assets at a loss in a crisis; you just spend your cash and replenish it when the market recovers. You ride it out. Time and patience solves most problems. This emergency cash fund negates Order of Returns in all but the worst-case scenario.

Which for me might have been if I’d stepped away from engineering in 2008 rather than 1998. Yeah, 2000, 2001, 2009, those years kept me up at night. Thankfully, we came out the other side at least in as good shape as we entered. But we remain vigilant.

Now that the seeds are planted, we can only wait to see what grows. But the trick to financial independence, whether to pursue a dream or with the goal of retiring early, is that you and only you are responsible for tending the garden. So be sure to choose the instruments with which you tend its rows wisely.

© 2019 Edward P. Morgan III

Death and Taxes - Planning

When I was in high school, my best friend came from a background much different than my own. From a young age, he and his siblings worked. Not to generate a little extra spending cash like I did; they contributed to the family income out of necessity.

His mother, who was their head of household, had an interesting rule that stuck with me. When she or my friend or his brother came into a bonus or some overtime, not all of it automatically fueled the family coffers. Whoever’s windfall it was kept a portion of it to do with what they pleased. The rest went to common finances.

Now you might think this arrangement seems a little harsh. Shouldn’t the person who did the work get to say what happens to that money? Maybe. But his family lived more hand-to-mouth than I ever have, mostly due to circumstances of birth which I won’t get into. For them, middle class was a goal, not a birthright. Theirs were subsistence economics. This arrangement was a necessity to keep the family afloat.

But my friend’s mother was a very wise woman. I learned a great deal from her on a variety of subjects. Here, she was tapping a fundamental piece of economic psychology, one I’ve used to our advantage again and again.

Pay yourself first. But don’t starve yourself of a reward for your efforts or good fortune.

This is an important concept, one many people miss.

I’ve said before, personal finances are a lot like dieting. Making a radical change and going into starvation mode usually doesn’t work. In fact, most studies have found that mindset is counterproductive. Partly because we can only go so long before we need a reward or treat for our efforts. Yes, most of us are little children deep inside, or Pavlov’s pet. If we deny ourselves for too long, we are likely to binge when we get the chance to make up for what we missed. That’s deep-rooted evolutionary psychology from a time when our daily existence was often feast or famine.

I know better than fighting fundamental psychology. My id is devious and cunning. It almost always wins these fights. It will definitely fixate on what it’s missing. But if I can put it to sleep with a little treat, it will focus elsewhere.

Example time. As I said before, when Karen and I were living in Maryland, she was carrying some credit card debt. Anyone who thinks federal employees are overpaid has never tried living on one’s salary right out of school in DC. Anyway, to work it down, she needed to save some money. One of the ways she did this was by always paying herself first.

Back in the day, we didn’t use credit cards for daily expenses. Not only was it impractical, it was also actively discouraged by most businesses. For our day-to-day needs, we carried cash. Fortunately, greenbacks not the Rai stones.

Which meant every payday Karen went to the bank or ATM to withdraw money to see her through the week. To pay herself so she could work down her debt, every time she withdrew money from checking, she made an equal transfer from her checking to savings. This simple act reminded her that debt was still out there needing to be paid. At the end of each month, she took the extra she’d saved and applied it to her credit card debt, rather than just throwing in the minimum payment. In under a year, the debt was gone.

But she didn’t starve herself of a little spending cash to see her through each week. Which meant for her the practice was sustainable.

Once banks got a little more electronically sophisticated, this became easier. As I mentioned in the essay on budgets, we created a hierarchy of deposits which fuels our overall finances. Karen’s paycheck goes directly into our joint savings. From there, we have an automatic transfer to our joint checking for our normal monthly expenses. We also have two more automatic transfers to each of our personal savings accounts (where we each have another automatic transfer to our personal checking accounts). It’s a kind of waterfall effect, with money flowing in then dividing into separate pots, each without our having to intervene.

We operate out of our checking accounts. Which means we don’t see our savings on a day-to-day or week-to-week basis.

As I’ve said before, we don’t miss what we don’t see.

The money that goes into our personal accounts, savings and checking, is ours to spend alone. The other person doesn’t necessarily see where it goes, unlike the joint account. That means we each get to manage our own weekly reward and savings for special purchases without having to consult the other. Yes, we still buy special things for both of us out the joint account. But I don’t have to bother her with weekly lunches or coffee, or that special game I see in the local gaming store. She doesn’t bother me about yarn or jewelry. It works for us.

And because we use our checking accounts as our operating capital to meet our immediate needs, our savings (both personal and joint) continues to grow. Though part of this works because we grew up with checking accounts, not credit and debit cards.

We didn’t stop there. We used to have two more areas of automated savings, which through circumstances has winnowed down to one.

When I started my job down here in engineering, the company I worked for took their US Savings Bond drive very seriously. They prided themselves on 100% participation and got really tiffy if the CEO didn’t get honored for it by the government every year. They put a lot of pressure on employees to participate.

Being engineers, a number of individuals I knew just contributed the minimum allowed and set it so they would never receive a bond. A friend actually fought the unofficial policy by not contributing at all which ended with him in a series of managers offices receiving lectures all the way up to a VP.

I looked at it differently. I saw it as an opportunity. I contributed something like $25 a week to build up some savings. Savings bonds weren’t a horrible investment at the time (before George H. W. Bush gutted the way interest was paid). We continued contributing through Karen’s job until Treasury (under George II) restructured the program and made it much more difficult to contribute automatically. By then, we had enough bonds to put a new roof on the house. Those bonds, which continue to increase in value, serve as our house emergency fund. They aren’t a great return, but they are guaranteed. In general, they are better than a savings account and more accessible than a CD.

Our second automated savings opportunity is longer term. Both our employers had 401k plans or equivalent. Both had some level of matching contributions. This investment pays a couple different ways.

First, the contributions are pre-tax (tax deferred until you withdraw money in retirement which should be at a lower tax rate). So immediately, we are essentially saving our tax bracket on that money (when we started around 28%). That alone is an outstanding return on investment, though as I said, the taxes are just deferred.

But it doesn’t stop there. Because her employer matches her contributions in a hierarchy, they are basically giving her money to participate. Now here, a few people get confused. They think that because their company only matches the first, say, 3% they contribute from their salary one-for-one and the next 2% at one-half-to-one that they are only gaining 4%. In reality, they are gaining 80% on that investment (they contribute 5% of their overall salary to which the company adds another 4% of their overall salary for free). That is a huge return on investment even before taking into account the average gains on the S&P.

Of course, she can contribute more than that theoretical 5%. There is a maximum annual percentage as well as an overall hard dollar maximum. And because she’s over 50, there is an additional “catch-up” contribution which basically bumps that maximum up by another quarter. Since we’ve been married, we’ve maxed out our contributions, upping hers when she turned 50.

As well, Karen’s 401k equivalent has some of the best index funds and lowest management fees in the industry (much less than 1%). Which means almost all of her money goes directly to work. And because the contributions are automated each paycheck, we take advantage of any market dips throughout the year.

But wait, there’s more (order now and you’ll also receive…). Because, again, she doesn’t make that much money, we qualify to contribute another chunk of money (with another catch-up) to personal IRAs (traditional or Roth). And because she still doesn’t make that much money, the IRS subsidizes the first $4k of our contributions with a 10% tax credit ($400). For those keeping track at home, remember that $2k savings I mentioned in the essay on Discounts? Yup, there it is, working its little heart out so I don’t have to. And yup, that first year’s contributions are guaranteed the average S&P returns regardless of what the market does.

Now you begin to see where all that money we freed up from mortgage and car payments goes. Trust me, seeing the statements of how much we’ve saved provides a tidy little jolt of dopamine each quarter. And people are paying us to do it.

Let’s do a little quick math. Let’s say you have an employer that through a combination of direct contributions and matching is willing to add $4000 a year to your 401k. Let’s say you have a 30-year career ahead of you. And let’s say, because you are already pretty lucky, that you can capture the average S&P returns for that 30 years. What would you be leaving on the table by not taking it?

Plugging that into my quick search internet compound interest calculator (with annual payments)… $693090.64. Yup, you read that right, almost $700k. And that would be on top of the $866378.90 (just over $850k) from your $5000 a year contribution from the example above. That translates to $240k and $300k over a more realistic 20-year contributing career.

Ok, let’s settle back to something many people will find more realistic. Let’s run those same numbers for getting a $200 tax credit on $2000 IRA contribution, again for 30 years. The annual tax credit alone ends up worth just under $35k. The base $2000/year contribution ends up at just under $350k. (see the Notes and Asides for a caveat to these calculations)

Thirty years. For most people with a full retirement age of 67, that means starting those contributions at 37 years old. Quite doable.

Now of course, with inflation, management fees and the vagaries of the market, it’s not quite worth that much, but you get the idea. That’s a lot of money left on the table.

Pay yourself first, especially for retirement. What you don’t see, you won’t miss. And always take the free stuff. Win-win-win.

And there’s one more little tax break we take advantage of, Karen’s Flexible Savings Account, which basically allows us to spend pre-tax money each year on medical expenses (including dental checkups and glasses). While the rules are more Byzantine than an HSA, and the amount we can contribute is limited, we can’t beat the subsidy on routine medical we get from it being pre-tax. Beats the S&P any day.

Of course, before we were in that position, we were paying down debt. So, when Karen received a small inheritance, she used half of it to pay off the remaining note on her car. The other half she used to take us on a trip. When I was deep into overtime the year we got married, over half that money got poured into the mortgage, which is how we eliminated it even earlier. The other half went into things we wanted around the house. Now, if Karen gets overtime, a bonus or travel money (which doesn’t always happen and isn’t much), half gets dedicated to funding our IRAs and half usually goes to vacations (with at least some amount to yarn).

Which brings me back to allowances and another principle we live by: When it’s gone, it’s gone.

Funny thing about an allowance. In my experience, until very recently, I would always spend whatever money was in my pocket. When I had very little money, I didn’t spend it if I didn’t have it. When I increased my allowance, I usually spent close to the limit I carried. By the way, yes, I used to track this in my budget numbers, mostly out of curiosity.

Again, this is fundamental psychology for most of us. If you don’t have it, you won’t spend it. Of course, credit cards changed that calculus significantly. With them, it’s quite easy to spend what I don’t necessarily have, or at least want to have.

Remember way back in the essay on budgets where I said there were two kinds of budgets, a long-term and a short-term, and I said I’d get to the short-term later? Guess what time it is.

Full disclosure, I ran across this exercise in some article or book about twenty-five years ago. Credit cards had just begun to become ubiquitous for daily purchases, at least in certain crowds, which included me at the time. Because of the ease of purchases, more and more people were getting into trouble with them.

The exercise went like this. Set your credit card (or debit card) aside for a month. Each week, take out your allowance from the bank in cash. Yes, most people have what they consider to be an allowance, even if not a formally designated one. Instead of putting that cash in your wallet, stick it in a small notebook you carry in your pocket. Every time you spend any money, write it in that notebook with a date and time. It doesn’t matter how small the amount, even $1. Just make sure it’s noted every time.

At the end of the month, review those purchases. Group them into categories which can be broad or narrow, like lunches, dinners, coffee, movies, drinks, clothes, jewelry, craft or hobby supplies, gifts, gas, cigarettes, etc. Whatever categories best fit. How many of those purchases do you not remember making? How many that you remember gave you a distinct sense of joy? How many were just out of habit?

Many people end up being amazed how much they spend on coffee in a month. Or alcohol. Or cigarettes. Multiplying that by 12 gives you how much you spend on any given category in a year. The cliché example is buying coffee on your way to work each morning. It’s only $5. I hear that from people all the time. It’s only $5. That’s $25 a week, or $1250 a year. Even $5 a week is $250 a year. The question to then ask is do you get that level of enjoyment out of that purchase?

For me, this was a useful exercise. One of the things it changed was that instead of stopping in the company cafeteria for coffee each morning (which was crap), or buying into one of many coffee funds (which were also crap), I bought a thermos and started bringing in coffee I brewed at home (which was definitely not crap). A cheaper, better alternative. I also cut back going out to lunch to only Fridays, which had the added side benefit that I lost weight even though I wasn’t really trying to. All of which meant my allowance stretched farther and my savings built up faster (as well as my looking more svelte).

Now I’ve never really liked shopping but once upon a time in her princess days, Karen did. Every now and then she still gets the itch (she grew up as a mall child, just like me). She finds that sometimes grocery shopping can fulfill that urge. Other times, it’s thumbing through catalogs. If she’s really jonesing, she goes shopping for shoes or bras she really needs. That almost always cures her. It’s a weird trick but one that works for her and doesn’t burn through her allowance buying things she doesn’t necessarily want or need. In favor of things she does, like yarn.

When it’s gone, it’s gone.

That same philosophy applies to us with maintenance.

A number of years ago, we were watching an American Experience on the Great Depression. One of the sayings used by people who went through it or were born into it was, “Use It Up, Wear It Out, Make It Do or Do Without”. When I bounced that off my aunt, who was born in the middle of it, she said, that’s exactly right. So many people could learn from that in today’s disposable society.

For us, that translates to waste not, want not. As I’ve mentioned earlier, we will fix or improve things rather than immediately buying new. Which, oddly, seems to get reflected in the amount of trash we put out compared to our neighbor’s trash migration each week (they are always coming home with something). A personal choice.

But we have found that when we take care of things, we value them longer. And if we have fewer of them, we don’t get paralyzed by having too many choices, which is another condition confirmed by psychological studies. More on that in another essay.

In general, maintaining a car or the AC, though somewhat of a hassle, is easier than the bigger hassle of buying a new one. And as I’ve said before, we prefer to buy quality which we think will last. It probably helps that neither of us ever looks forward to shopping for new things because our tastes run far enough outside the norm that we can rarely find what we want or envision.

As I mentioned, my car is almost 30 years old. A bunch of years ago, a friend who we gamed with offered me double its Blue Book value. Cash. Tomorrow. He was dead serious. As was I when I turned him down. But to get an offer for half of what I’d paid for it a decade later said something about both the initial choice I’d made and the way I’d taken care of it. Our mechanic used to make us offers to sell it all the time. Of course, I’ve replaced the roof and Karen’s now resewn the seats.

We’ve bought one set of bedroom furniture since we’ve been married. It’s solid pine and matches a number of bookshelves, the spare bedroom set, end tables, a set of storage cubes, a corner cabinet, a chair, a sweater chest, a stereo cabinet, a wine rack and the game table. We picked it up in stages as we could afford from various manufacturers, some at closeout. Several years ago, when we had a mold issue in the house, we had to take all of it out into the garage and revarnish it. I’ve had to repair a notch taken out of one of the bookshelves. Just last month, Karen had to replace the cheap staples they used on her drawer fronts with screws.

But we knew when we bought it that it would last if we took care of it. Sure, there are scratches from various cats either using a piece as a launching board or making a hard landing. But those varnished over scars just remind us of those missing cats. And in the intervening years, Karen has made a paperback shelf, a DVD cabinet, two CD cabinets and a game table top to match the set. And all of it still glows when it catches sunlight.

As another example, when we first moved into the house, Karen really wanted a solid wood front door. We both wanted a door with a window but she insisted on solid wood. We made a deal. If she took care of it, we would get it. Which she has. Every year, she goes out, sands it and applies a fresh coat of spar varnish. This year, she made repairs to the jam where it had rotted from below. But looking at it, you wouldn’t think it was a 25-year-old door. We’ve known people who couldn’t get their solid wood doors past year five. Personally, I don’t think I could have. But Karen did.

A quick third example. When we bought the house, the back bathroom had countertops that could best be described as Flintstone fluorescent green marble. Yeah, lovely. Oddly, Karen (it was her primary bathroom) decided that she didn’t really want that color scheme. But instead of ripping out the cabinets and countertop and replacing them with something new, she had it resurfaced with a new laminate including replacement cabinet doors and drawer fronts for a fraction of the cost. And that minor improvement endures to this day as both of us remain content with the conservative color scheme she chose.

And in case you think it’s just her, ask me about the 25-year-old pair of Birkenstocks I glue back together every time the leather separates or the cork cracks. They cost a lot more than regular shoes, but no pair of sneakers has ever lasted that long. And I wear them every day around the house. Or ask about the only pair of dress shoes I’ve ever bought that still hold a polish.

Sometimes you have to spend money to save money. Our house is 40 years-old this year. Our cars are 30 and 17. Our washer (with a new knob) and dryer, almost 30. Our stereo and speakers (some of which we’ve refoamed), 25. Our freezer, almost 20. Our fridge and dishwasher, 15. Our TV (with a replaced power supply), 14. Our stove is original to the house. The list of items we could have upgraded or replaced for newer models with more features goes on and on. But what we have suits our needs and desires just fine. Quality shines.

I’ve found that there is something about pride of ownership that makes people envy what you have just as much as if you had the biggest, brightest, newest, ooooow shiny. And sweat-equity costs so much less than replacement if you start with good bones.

Simplicity, discipline, patience and planning.

Which brings me briefly to the first part of the title. Planning for the inevitable but unforeseen.

A number of years ago, I was talking to my mother when the subject of life insurance came up. I mentioned that while Karen has a basic amount provided through her job (with no premiums for us), we don’t have a policy on me. She was aghast. How could we not have life insurance? (kind of missing the point we did on Karen, just not on me. When I was in engineering, I carried a minimum policy, too).

Well, we don’t really need life insurance at this stage of our lives. The intent of life insurance is to provide a replacement income in case someone dies. It makes a lot of sense for young couples just starting out or couples with kids, or anyone with a dependent who might not be able to make up that income. A minimal amount makes sense to save someone burial costs (which we could get for free through our credit union). We are not in that position. If we had kids, it might be different.

Insurance at its heart is a hedge against uncertainty. In most cases the uncertainty is likely to occur, we just don’t know when. Everyone dies. The vast majority of us get sick. Many people get into auto accidents, whether through their fault or someone else’s. At its heart, the insurance industry, which has been around at least 2000 years, studies the average occurrence of various possibilities and their costs in various locations (ok, this is how it ideally works, so save the snark).

Because like most of people who don’t have the operating manual to their crystal balls, we don’t know whether certain events will occur (like a direct hit by a hurricane, or breast cancer) or when (like dying). In general, insurance provides a good hedge against that uncertainty, in much the same way a fixed interest rate, fixed payment mortgage hedges against interest rate uncertainty. With insurance, pooling the risk among a large enough population is what allows those collected statistics to work.

In general, I like hedges against uncertainty. If I had any lingering doubts, 2007 cured me of them. But likely I would have been content either way because I understand the math and how the dice can roll.

In the same way, while I would never willingly go without health insurance (having it in 2007 paid us to the tune of $300k in dividends), we don’t need dental insurance right now (it’s a wash because our teeth are sound). We might be able to get our money out of vision insurance but every time I’ve run the numbers, it’s been basically a wash with the other discounts we can unlock (which don’t stack).

Homeowners insurance we still have even though we no longer have a mortgage (which requires it). Though with the rise in premiums and deductibles for wind-storm damage, it might be better to get an umbrella liability policy combined with another for fire, theft and casualty. I’m not quite ready to make that leap.

Auto insurance is required by law, and I am generally lawful at heart. Though with the age of our vehicles, comprehensive really doesn’t do us much good (except for replacement windshields for the Jeep, which has needed two). And because we have good health insurance, we don’t really need the coverage for uninsured motorists as I understand it.

We’ve considered long-term care insurance through Karen’s work but unfortunately, the opportunity to sign up for it only comes around every 5-10 years. The last time it did, she was still disqualified for being too close to her final treatment. Regardless, I have heard mixed reviews on whether you can ever get your money out of your premiums. It is increasingly difficult.

All of these are planning trade-offs with potential savings and expenditures that we weigh out year after year as our situation changes. But like an old Soviet 5-year forecast, life often has other plans.

Which is why we keep living below our means. As we plan to do for the foreseeable future. 

© 2019 Edward P. Morgan III 

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