Does Jimmy practice what he preaches?
My personal finance strategy
I offer up lots of personal financial guidance — to paying clients, newsletter readers, and audiences in various workshops and classes I lead. You may be wondering — What does Mr. Know-It-All do for himself? Does he heed his own advice or is it just for those knuckleheads foolish or naive enough to listen to him?
It’s time to fess up with how I approach my own personal finances and see if I do what I say…
1. Keep it simple
My account structure is straightforward. I have one bank account and investment accounts at Fidelity and Vanguard. Both vendors are popular with my clients so I use both to stay current on their services; otherwise, I’d slim down to just one or the other. I don’t have any old 401Ks lying around as I rolled them over to my IRA when I left those jobs. I don’t install the Fidelity and Vanguard apps on my phone — it’s a bit safer and removes temptation to check on things too often.
2. Be cheap (with myself)
I try to be cheap with myself but generous with others. I’ll leave it to others to judge if I’m successful with either.
I’m no more disciplined about consumer spending than anyone else. To compensate, I try to hit the pause button before clicking the BUY button (for stuff I probably don’t need and will later regret). I’m amazed at what I end up not buying because I came to my senses and deleted it from the Amazon cart.
3. Track spending
I don’t have a “budget” but I do have an annual spending target. I track my monthly spending and if it’s about where I want to be, I find something else to worry about. I don’t care about individual categories — food, travel, etc. — only the total.
4. Credit card use
I use credit cards for all my spending and importantly, I pay them in full each month. I use two cards — one that gives me 2% cash back on everything and an Amazon card that gives me 5% back at Amazon. I prefer cash to any other rewards on offer.
5. Delay claiming Social Security
I’ll delay claiming Social Security until age 70. It’s the world’s greatest annuity (see next point) and its lifetime value is maximized by waiting. I encourage clients to do the same, especially for the higher earner if they are married.
6. Lifetime annuity
At about age 70, I plan to purchase a single premium income annuity (aka, lifetime annuity). This can make a lot of sense under certain scenarios but, essentially, it’s a bet on my life expectancy being above average. I’m targeting an annuity amount that, combined with my Social Security benefit, will cover almost all of my monthly spending (see #3). I recommend this to clients, when sensible, and as far as I can tell, few do it.
7. Insurance coverage
For my auto and homeowner’s insurance, I opt for high deductibles. My general approach is to self-insure against affordable risks — no AppleCare for my tech, car rental insurance, long-term care insurance, nor life insurance. I violate this rule occasionally such as travel insurance for a trip during the height of COVID and pet insurance for our dog.
For Medicare, I’ve opted for an Advantage plan with a $0 monthly premium but a high annual out-of-pocket maximum. It’s neither right nor wrong, but I’m trading off the benefit of lower monthly premiums for the risk of higher total annual spending if I consume a lot of health care.
For my auto and home, I have an umbrella liability policy that provides additional catastrophic coverage beyond the basic policies.
8. Low-cost index funds
I invest in stock and bond index funds with the lowest expense ratios, typically just a few basis points (a basis point is 1/100th of 1%). I stay away from individual stocks and bonds, expensive mutual funds, ETFs, crypto, metals, restaurant concepts, franchising opportunities, RobinHood day trading, etc.
9. Inflation bonds
I like inflation bonds as real interest rates have ticked up. The US government has two flavors — well-known I-Bonds and TIPs — and I own some of both. The I-Bonds require an account at TreasuryDirect.gov and have favorable tax treatment; the TIPs can be purchased in a dedicated mutual fund but have an unfavorable tax treatment so I hold them in my IRA.
I rarely advise people to purchase TIPs as they’re complicated to understand and they’re unsuitable for a taxable account. I sometimes advise people to buy I-Bonds but they have their own limitations in terms of an arcane account set-up and a $10,000 per year contribution limit.
10. Asset allocation
I set an explicit target of my net worth for cash, bonds, and equities, as well as a proportion to be invested in non-US stock funds. Everyone’s circumstances are different but I always have a conversation with clients about risk tolerance, goals, diversification, simplicity, and how that translates into a suitable asset allocation.
Editor’s note: you can read my Ten Commandments of Investing here.
11. Target date funds
I don’t use target date funds though I advise nearly all my clients to do so. I’m a proponent of them because they’re simple (see #1), low-cost, easy to understand, and importantly, can be on auto-pilot with essentially no intervention required.
Why don’t I use them? First, index funds are even lower cost. The difference is only a few basis points but I’m cheap (see #2). Also, I can tax-optimize my investing by concentrating my bond allocation in my IRA and my stocks in my taxable account. Finally, it offers more opportunities for tax loss harvesting.
I don’t recommend this to most clients because it’s complicated, requires hands-on intervention, and leaves many temptations to make adjustments when it would have been better to have done nothing. The savings are small and not worth the ongoing effort for most people. For clients that are sophisticated and hands-on do-it-yourselfers, I do suggest this approach.
12. My 5% rule
Like many people, I’m tempted by the occasional investment opportunity that sounds great (but likely to turn out badly). When I do this, I limit my stupidity to less than 5% of my net worth.
I encourage this same 5% rule with clients — try almost anything but make sure it’s a cheap lesson.
13. Roth IRA conversions
I convert a portion of my pre-tax IRA to my Roth IRA in any year when my income is low. Essentially, I’m paying taxes now on my IRA at what is hopefully a lower rate than I would when I’m older and forced to take distributions and also have Social Security and annuity income.
14. Maximizing tax-advantaged accounts
When I had a real job, I maximized 401K and HSA contributions whenever available. I also took advantage of 529s and Roth IRAs when I was eligible. These are all variations of free money and I always urge clients to do all of them.
15. Donor-advised funds
When I had a high income, I contributed to a donor-advised fund. I took an educated guess at what my lifetime charitable giving might be and donated it all during my highest income year. This allowed me to take a tax deduction when my marginal tax rate was at its highest. In the right circumstances, I advise clients to do the same.
Summary
If you made it this far, well done. With few exceptions, I do practice what I preach. But, just like everyone else, I make plenty of irrational and emotionally-triggered personal finance decisions that I later regret. We’re human.