Monday, November 02, 2020

How Much Risk Is How Soon

Everyone else is losing their minds over the election, so I figured I'd deviate to something else entirely. I had a discussion with family members yesterday wherein, considering my long track record of detonating atomic bombs in my life, they figured my radioactivity-scarred body might hold some wisdom about money. Naturally, I spoke at great length and only stopped when I saw them making poorly-concealed throat-slitting gestures to each other.

The conversation branched all over the place, so I thought it worthwhile to encapsulate my thinking here.

Basic Philosophy

Money gives you freedom. It gives you freedom to make choices and freedom from anxiety. That's it. That's all it does. Pursuing it for its own sake is a path to madness. If you're doing that, stop it right now. Looking back on my life, I don't wish I had made or saved more money, I wish I had made or saved more relationships. Don't let it come between you and your loved ones. If they express financial anxiety to you about risks or getting a late start on investments, take them seriously. Believe me, those atomic bombs are e-x-p-e-n-s-i-v-e.

Why Dave Ramsey?

I like Dave Ramsey's baby steps. I don't think they're optimal, I think they're good enough and that's perfect for my philosophy. You can follow them, knowing they'll get the job done and not have to think about it after that. Here they are in detail, listed below in brief.

  1. Save $1000
  2. Pay off all debts, smallest to largest
  3. Save 3-6 months living expenses
  4. Put away 15% for retirement
  5. Save money for your kids' college expenses
  6. Pay off your home early
  7. Party on, dude!
I've read a lot of criticisms about these steps and they all amount to finding ways to make your money numbers biggerer by some pointlessly incremental amount. I don't do that. All I want is a sensible plan that allows me to follow it and not think any more about it. My life isn't about money, my life is about raising cotton, photographing the stars, cooking fried foods and making my family wince.

Dave's plan is good enough.


How soon is how much risk. If you won't need the money for a decade or more, then you can cope with a lot of risk. If you might need the money next week, you don't want any risk. Risk means return.


For retirement, I recommend SPX. The chart below tells you why.

You can see the Dot Com Bust, the Real Estate Bust and the Wuhan Flu Bust on this chart. All that matters is the start and the end. The busts can be safely ignored if your time horizon is 5-10 years.

Including the massive hit during the Great Depression in the 1930s, SPX has returned between 8% and 10% per year. Set it and forget it. Why are you thinking about money? Stop it. Go live your life.

Some people will recommend individual stocks. I'm not a fan of that because I'm too lazy to track them. My father was the greatest stock picker I have ever met, but he had an MBA from Harvard, back when they still taught things, and he spent the last 60 years of his life learning how to pick stocks. His returns regularly blew away the stock brokers who handled his investments.

If you want to spend time every day reading the WSJ after 5 years of getting an instinctive feel for financial statements, go for it. Me, I'm going to pretend I'm from Dixie in the kitchen and in the garden, y'all.

Emergency Savings

The cash you might need next week because boll weevils wiped out your crop or your neighbor had too much watermelon wine and plowed his F-150 into the side of your house ought to be in checking or savings. Forget the interest rates, just leave it liquid so you can pull it out. Emergency savings is there to sooth anxieties. Worrying about returns is more anxiety. Stop it. Admit that it will sit there and do nothing and go back to your life.

Bonus Suggestion: Take some time to write down your biggest fears. Is it fire, flooding, termites* or something else? Research what it will cost to cope with these so you can pick your savings level with confidence. Maybe beefing up your insurance policy makes more sense than stashing more cash in the bank. Insurance is there as a big-time backstop for your savings. In addition to being a grand national champion stock picker, my dad was a maniac for insurance for just that reason.

Saving For Big Purchases

This is a meh spot for me. I'm with Dave on this one. My intermediate investment was always to pay down my mortgage. I never tried out corporate or government bond funds as a 3-7 year investment because it was too much work. If I was saving for a $5,000-$30,000 purchase, I would simply put it in a savings account in the bank, separate from checking. I did that because, as Dave says, spending and savings are more emotional than logical. Money in savings, KT no touch! Money in checking, KT spend!

These days, neither checking nor savings earn a thing, so it's all a wash, but separating it provided the emotional discipline I needed. ... OK, I just checked Wells Fargo's rates for their Certificates of Deposit, wherein you stash your cash for a specified period of time and they are practically zero. CDs are a terrible investment.

I suppose that if you couldn't stand not earning a bit on your investment, you could put it in a bond fund. I never had the money available to do that, so it's not something I understand all that well. Shrug.


Pick a simple plan, like Dave's, and follow it. Then stop thinking about money and go live your life. Happiness is not correlated with money.

A 2010 study out of Princeton University found that there’s a correlation between happiness and wealth, to a point of about $75,000 per year. When people make more than $75,000 a year, their happiness doesn’t increase...

Lastly, people are more important than things, even green things made of paper with curvy, multi-digit numbers in the corners. Go live. 

* - Termites are no joke in SoCal. In the South, it's wood rot, near the wilderness in the Southwest, it's brush fires and up where the Yankees live, it's the double threat of bad food and sullen people. 


Tom said...

Direct deposit is a handy tool for saving. I only see about 15% of my pay after diverting funds to other accounts. The mortgage is money I never see come or go. The monthly tuition payments go to an account even though the boys haven’t been to that school in six years, the car payment continues to be set aside even though the car was paid off five years ago, and the $100 a month for toys accumulates while I decide if I need any toys.

The downside with savings accounts is that with inflation you effectively lose money, but that’s a cost of being liquid.

K T Cat said...

Great points all. If you can take the decisions out of your own hands by pre-disposing of your income, you won't be tempted to make a few changes just this once.

Ohioan@Heart said...

I remember when we first started setting money aside for retirement. That 15% of your salary seemed like Mount Everest. But Mrs Ohioan and I decided we could take a small step up the slope each year by taking 1/2 of every raise and putting that into our 401(k). It was surprisingly fast to the full 15%, and then to having a retirement account with enough funds to make for a comfortable retirement.

Really that’s just another approach to the same simple and logical path you’ve both described.

K T Cat said...

Thanks for the story, Ohioan. I can remember those early, budget-stretched days, too.

Mostly Nothing said...

I've been less concerned about retirement lately. We have been planning to meet with our financial guy all summer. But he said they were partnering with a new company in October, and with Covid we've been waiting. Need to get back to that soon. I have been raising my 401K yearly, so I think I'm ok, we'll see. My brother who is 4 years older than me has been retired for 3-4 years now. Two good incomes, no kids, 2 houses.

I did have a bit of a windfall this year. I was laid off after 25 years, and got a good severance. And since I saw he direction of the company, I'd been looking. I got a new job, starting just 2 weeks after my last day. So I paid off a car and the mortgage, which were close anyway. And still have a good chunk left.

We had refinanced 3-4 times of the year, and had rolled a home equity loan for new siding and windows in. Still we paid the house off 2 years before the original mortgage would have matured. The new job is the other side of town, if we ever get back to going into the office, we might consider moving. But thoughts of a cabin 'Up North' also pop into my head on occasion. With an eye toward retiring to it to get out of the madness.

I've never considered that I was very good at money. You'll remember our workout challenge back in the day. That kept me from spending too much on music for a year or two.

Foxfier said...

I think the $1000 is a bit low-- I try to keep that as the "cushion" in our checking, and then have $1000 for basic emergency in savings. THEN we have three month's of "there is no paycheck" savings-- which we have had to dip into at times.

So now we pay down debt so that at bare minimum, we're 29 days ahead of the due date (more if possible), the kids have savings accounts (which probably won't amount to much, but it's there and if rates ever go up again we'll throw them into CDs or something) and we always pay Just A Bit More than what's required.

Haven't crashed, yet.

Foxfier said...

Mixed in there is moving every two years or less, buying three houses, six kids two of whom had major medical bills, my husband's service-related-but-not-officially-recognized-until-3-months-ago physical issues, and I broke my foot in there somewhere. (You know those baby bouncies that are shaped like a V? My foot hit it...)