Does Jimmy practice what he preaches?
My personal finance strategy
I offer up lots of personal financial guidance and you may wonder — What does Mr. Know-It-All do for himself? Does he heed his own advice or just dish up mansplaining for knuckleheads 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 (Ally) and investment accounts at Fidelity and Vanguard. Both are popular 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 as 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 my spending than anyone else. To compensate, I try to hit the PAUSE button before I hit the BUY button and am amazed at what I end up not buying because I came to my senses and deleted it from the Amazon cart. (The recent demise of Temu has also put a dent in my discretionary spending.)
3. Track spending
I have a spending target and I track my monthly spending. If it’s about where I want to be, I find something else to worry about. As I tell clients, I just track the total and don’t overcomplicate things by looking at various spending categories.
4. Credit card use
I use two credit cards for all my spending and pay them in full each month — 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 credit card rewards.
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.
More here:
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 most of my monthly spending (see #3). I often recommend this to clients, and as far as I can tell, few do it.
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7. Insurance coverage
My general approach is to self-insure affordable risks — no AppleCare, extended car and appliance warranties, car rental insurance, long-term care insurance, nor life insurance. I violate this rule occasionally such as travel insurance for a trip during COVID and catastrophic pet insurance for our dogs.
For Medicare, I opted for an Advantage plan with a $0 monthly premium but with co-pays and a high annual out-of-pocket maximum. It’s neither right nor wrong, but I’m trading off the benefit of no monthly premiums against the risk of higher total annual spending if I consume a lot of health care.
For my auto and homeowner’s insurance, I opt for high deductibles. I also have an umbrella liability policy that provides additional catastrophic coverage beyond the basic policies.
I’ve evaluated long-term care insurance for me and flood insurance for our house and decided not to do either.
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, restaurants and franchise investment opportunities, RobinHood day trading, etc. It’s a simple strategy. (See #1.)
9. Inflation bonds
I like inflation bonds as real interest rates have ticked up. The US government has two flavors — I-Bonds and TIPs. I used to own both types but sold the I-Bonds partly for simplicity and partly because their yield is now lower than TIPS.
I rarely advise people to purchase TIPs as they’re complicated to understand and they’re ill-suited for a taxable account. I used to advise people to buy I-Bonds but as they’re presently priced, I now tell people to cash in what they have left as they’re no longer a bargain.
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.
More here:
11. Target date funds
I don’t use target date funds though I advise many 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.
I don’t recommend this to most clients because it’s more complicated, requires hands-on intervention, and leaves 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-yourself’ers, I do suggest index funds.
For taxable accounts, I don’t recommend target date funds.
12. My 1 to 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 1 to 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 each 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.
More here:
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.
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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. Instead of cash, I’d donate mutual fund shares with the largest unrealized gains. In the right circumstances, I advise clients to do the same.
Summary
With few exceptions, I do practice what I preach. But, just like everyone else, I make my share of irrational and emotionally-triggered personal finance decisions that I later regret. We’re all humans.
Here’s some clear, practical financial advice. Thanks, Jimmy!
Always such clear, practical advice. Thanks, Jimmy!