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Financial Simplicity: What is Your Time Worth?

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“Is the oil spilled? Is a little wine stolen? Say on the occasion, at such price is sold freedom from perturbation; at such price is sold tranquility…” –Epictetus

Money is a stepping stone to more important things. If you’re on track to your financial goals, you may not need to manage your wealth so tightly. But you don’t hear that message from mainstream financial advisors or media. They parade endless schemes, products, and services intended to save you money, make you money, grow your money. Lost in the shuffle is the simple truth that everything has a price. Optimizing your money is a double-edge sword: often, the price is your time, and peace of mind.

Money is just one of the variables when making personal finance decisions. Another dimension is time. Specifically, your lifetime. There are multimillionaires who worry about saving a few hundred dollars in taxes. Maybe they truly enjoy grabbing every last dollar on the table. But is it a good use of their vanishing days?

The diminishing return from maximizing your wealth stems from the additional accounts, statements, and tax forms. That rising time cost affects people in different ways. Some seem to relish the effort. Others, like me, find it onerous in the extreme. It all comes down to your affinity for paperwork, and the value you place on your time. If you don’t enjoy bookkeeping, and you do value your time for other pursuits, then saving a few marginal dollars doesn’t pay!

The Internet is a financial fire hose from which you can drink 24/7. Part of simplifying your life is limiting your intake of financial information. Most of the short-term financial news can be safely ignored. The key financial principles for the long-term don’t change: hard work, low expenses, diversification, patience….

“Our life is frittered away by details. Simplify. Simplify.” –Henry David Thoreau

What is your threshold for financial complexity? How much extra money do you have to make to justify adding accounts or paperwork or other financial baggage to your life?

For me, there is a “complexity tax.” I loathe complicating my financial life, and I’ll pay to avoid it.

Of course, this threshold will be higher, the greater your wealth. A college student will go to lengths to save a dollar that would be foolish for those of us farther along in life. In his classic How I Found Freedom in an Unfree World, permanent-portfolio architect Harry Brown reports that $100 is his threshold. He refused to spend time pondering smaller expenditures, preferring to focus on higher pursuits and bigger decisions.

Harry was more successful than most of us, but the principle still applies. Personally, I have a sliding scale for such matters: The value of my time depends on how I feel about the activity. If it’s something fun for me, like being outdoors or tinkering with computers I’ll “work” for $5/hour or less. (That’s another way of saying I’d spend an hour of my time to save $5.) If it’s something I tolerate, say certain house chores, my time might be worth $20-$50/hour. (We rent now, so I don’t fix toilets anymore, though we still clean our own house.) But if it’s something I truly loath like doing taxes, my time is worth $100/hour, or more. Yes, I’ve ignored tax deductions in that range or greater because they would require me to spend hours learning the tax code, gathering data, and completing forms.

I know that’s a shocking admission to some. But everybody should have their price. What is your time worth?

Sometimes extra complexity is justified, if you can’t meet your long-term goals otherwise. Saving in tax-advantaged retirement accounts gives you leverage for building wealth: It’s a good idea to create and fund those accounts during your working years. Even if you’re financially comfortable, there are certain sums of money that can’t be ignored. For me, when I’m evaluating very long-term saving/investing/tax strategies, I’m not too interested if the impact is less than about 5% of our ending net worth. I just don’t think that retirement calculations are accurate enough to justify much added expense or complexity at that level.

“…a person with one watch knows what time it is, but someone with two watches is never quite sure. And what’s worse, he’s become a collector.” –Elaine St. James

Small, inactive accounts, minor investment positions, extra credit cards. It all means more paperwork, more statements, more emails, more forms. Strive to eliminate the financial equivalent of “junk drawers.” They sap time, energy, and attention from important areas like your savings rate, investment allocation, and net worth. Near- and post-retirement, every financial decision should lead to less time, less paper, less cost, less worry, and less bother. The fewer financial details you have to track, the easier it is to optimize the ones that really matter.

I have two checking accounts and two credit cards: one is primary, one is a backup. Our assets are at three companies — Schwab, USAA, and Vanguard. That’s arguably one or two too many, but it gives me peace of mind. We hold just nine investment positions total. And I plan to continue paring that down. I expect to enter our 70’s with one or two balanced funds, and an annuity. End of story.

Admit it. Computers and the Internet have won: Say goodbye to paper. Financial institutions now offer electronic statements and auto payment options. I’ve changed all of our statements to e-mail, even for our largest investment accounts. All of our recurring bills are paid automatically by either credit card or checking account draft. (Paying critical bills from your checking account, rather than credit card, will save you time if your card number changes or is compromised by fraud, which has happened to me twice in the past year!)

File your remaining financial paperwork in one place, and keep reducing its size. My entire financial life fits in a single banker’s box now.

It was once common advice never to pay bills early, because of the interest you would earn from float. I think that’s a dubious strategy, even when auto payment was less common and cash actually earned a measurable return. So, you can make an extra 5 cents by postponing your electric bill for 21 days. The amounts are minimal, while the potential headaches and penalties for late payments are substantial. Micromanaging cash flow is fine for big business but, personally, if I have a debt, I get it paid off and out of mind as quickly as possible.

I have a six-digit sum in a simple savings account right now. It represents our living expenses for the next couple of years. It’s not even in a CD. If I wanted to play games transferring money between accounts or banks, I might earn 1% more. So, I’m giving up about $1K/year in income. But I can make that back by writing on my blog — something I actually enjoy doing. If interest rates go up substantially, I’ll reconsider. Meanwhile, I don’t want to waste time and energy playing musical chairs with online deposits. I don’t want that drag on my attention.

“Wall Street makes money on complexity. Everyone else makes money on simplicity. If it isn’t simple and cheap, don’t buy it.” –Scott Burns

You would think, after Enron and the subprime mortgage crisis, after credit derivatives and collateralized debt obligations, we would have learned our lesson. The more complex a financial instrument, the more likely it is to conceal high expenses and even outright fraud. Even if the price is fair and nobody is cheating, complexity raises the bar of knowledge required to efficiently buy, manage, and sell a security. That might be OK if you’re in business with full-time specialists working towards specific business objectives. But if you’re a near-retiree, managing his or her life savings, part time: complexity is poisonous. Even if you have a financial advisor, complexity can hide a lot of bad behavior, until it’s too late to do anything about it.

Sage advice from a bevy of seasoned money managers, including Warren Buffett, is this: “Invest only in what you know.” I took this advice to heart early in my investing career, and it has served me well. I own a small set of funds whose holdings and behavior I understand well: They zig when I expect them to zig, and they zag when I expect them to zag. While the overall economy is a continual mystery, there have been no ugly surprises in how my investments have reacted to it.

I have deliberately declined apparently safe, high-yielding investments — including GNMAs, MLPs, and closed-end funds — because I didn’t want to make the time to understand exactly how they worked and should be managed. Some of these investments have subsequently done well. So what? I reached my objective of early retirement anyway, and slept better along the way.

After you’ve chosen your holdings, there is potential for simplification throughout your investment activities. For example, rather than explicitly rebalancing in most of my accumulation years (potentially incurring taxes and transaction fees), I generally rebalanced using new money that I was saving, plus distributions from existing investments. Selling positions to rebalance, especially in taxable accounts, was rare to nonexistent for me. I also chose not to reinvest my distributions in taxable accounts, because that results in dozens of tiny lots, each with a separate cost basis. Rather I used those accumulated distributions at the end of each year to buy new positions in round lots. I lost tiny amounts of growth and income, but it simplified my life.

“Keep it simple: as simple as possible, but no simpler.” –Albert Einstein

What’s the biggest bogeyman in all of personal finance? Taxes. No subject inspires more fear and loathing. Taxes are frequently used as a scare tactic to pitch expensive or complex financial products and services with unclear benefits. All a financial advisor has to do is say you’ll “save on taxes,” add a barbed remark about big government and a wink — and the average investor will bite. Yes, if you’re relatively wealthy and live in a high tax bracket, then there are prudent actions to take to save on taxes. For many of the rest of us, beyond perhaps maxing out our savings in tax-sheltered accounts, the benefits of complex tax-saving schemes are often overrated.

For most of my professional career, I worked at home. In the early years, I deducted my home office as a business expense. The rules where simple, and money was tight. Eventually, as the rules became stricter, and my assets grew, I stopped taking that deduction. My associates were mortified. As a full-time, in-home, telecommuter I was ‘entitled’ to this tax savings. But I let it go, costing myself a few hundred dollars each year. Why? Because the associated record-keeping and tax forms required at least several hours of my time annually, much more in mental aggravation. Also, taking that deduction increased my risk for a tax audit — more aggravation still. None of this was worth the money to me. I paid the government, and kept my mind clearer for professional pursuits and optimizing the big wins in my personal finances.

I recently completed an extensive review of Roth IRAs and Roth Conversions including the potential impacts of RMDs. This is probably the most complex retirement math that I’ve ever investigated: The interacting factors are numerous, demand details of your financial life far into the future, and resist reduction to simple rules of thumb. My conclusion? While Roth IRAs are a good savings vehicle and have their place, Roth conversions have varying, sometimes minimal benefits. What is certain is that you’ll add substantial paperwork to your life — accounts, transactions, and taxes — if you undertake a long-term Roth conversion strategy.

“…the key to whatever success I may have enjoyed during my long investment career is that the Lord gave me enough common sense to recognize the majesty of simplicity.” –John C. Bogle

John Bogle, the founder of Vanguard, and creator of the first index mutual fund, is a multimillionaire. He is not a billionaire, like some of the Wall Street sharks who never had his sense of ethics or public service. But Bogle has enough. And he will be revered for decades to come, because he leveled the playing field for average investors.

Money is an irony. Once you have enough that certain complex strategies might be worthwhile, you might also have better things to do with your time. If you live in such rarified financial air, you’ll probably choose to hire professionals (lawyers, accountants, investment advisors) to optimize your finances. Just don’t feel obliged. You’re entitled to spend your money, and your time, as you wish. And, if you proceed with the pros, just make sure the benefits are worth the complexity and fees.

The future will always be uncertain. Complicated strategies to control it have a spotty track record. By keeping your financial life as simple as possible, you’ll avoid the fog of complexity, and see and react with more clarity as you navigate the road ahead. And, having increased your time and attention for more rewarding pursuits, you may actually arrive in that future richer!

Comments

  1. Nice piece. You are right on unnecessary complexity and the advisory world. The financial services industry vastly overstates the amount of oversight a portfolio or a financial plan need. Most regular people planning and saving for their future don’t need to update their plan on a regular basis and review their portfolios every quarter. However, this implied complexity is designed to create demand for ongoing services that just is not necessary for most people.

  2. Loved this. It has come at a ripe time for me. Even great simplicity takes thoughtfulness. With a warm cup of coffee, I have “living” to plan. 🙂

    Many thanks for this!

  3. Can’t agree with this article at all. My ability to retire early has been enabled by the time that I have spent, and will continue to spend, learning about investment strategies, tax law, and where to save a nickel here and there. I’ve spent a lifetime developing systems and plans that make sense “to me” and continuing to improve them.

    Yes, I have “enough”. But to abandon my lifelong habits now, would feel as wrong as deciding not to breathe. Just can’t do it.

    • Thanks Larry. I hear you. I put a great deal of time into planning my retirement too. I appreciate systems and have plenty of them. But they tend to be simple. I can’t honestly say that any kind of sophisticated investing, tax, or frugality strategies were instrumental to my early financial independence. It was mostly about saving a lot, keeping expenses low, and monitoring closely. But everybody’s experience is different. Maybe if I was more clever I could have retired sooner. 🙂

    • Sometimes there is a line that draws for itself where you have to stop. For instance, I had several friends in a NAIC stock club and met monthly learned to evaluate buy and sell stock. The club met at hours that were not compatable with my schedule. However, I got a copy of the NAIC booklet and read it on my own. I believe in what it preached: that anyone who can review all the relevant data on companies and perform an adequate evaluation can do 2 – 5% better in long term investing. That is to find good growing companies and hold them until they are no longer good growing companies. I attempted the research to purchase stocks. Hunting down the data was complex enough but actually reading company reports was pure torment for me. I attempted to do this three honest times and in the end having to read company reports and other relevant news articles about companies destroyed my interest in buying individual company stocks. I buy good, low cost index funds from Vanguard and Ishares.

    • You both are continuing to earn money thru work. Ralph by handling money and making financial decisions based on study and evaluation and Darrow thru his blog. You have different paths that lead to a positive end result.

  4. M. Bailey says:

    This was indeed very helpful. I am nearing retirement, in part earlier than I expected due to a recent inheritance from my parents. We’re not talking megabucks here, but it certainly adds to my retirement as a federal scientist. What I decided to do, in part because I did not earn my parents’ money (that they should have spent on themselves while healthy, but that’s another issue), I decided to put about 90% of it with a firm that invests only in socially responsible companies (no mutual funds) and real estate. I researched the firm before deciding on it, and it does cost 1% per year, but they make all the decisions about individual investments, and my mind feels at ease knowing that I am not investing in companies that betray the environment, workers, etc. The other 10% I am looking to invest myself, exactly what you have suggested – something simple such as mutual funds that I don’t have to micromanage. My work 401(k) is the same. Figuring out how much cash on hand is wise is not easy for me but once I figure it out, I wish not to worry about it all the time. As someone with no background in finance whatsoever, I appreciate you insights. I want to make my investments and not worry about them in the middle of the night!

    • Thanks for the comment MB. Nice that you found a way to use your inheritance that honors your parents and your values. You can make simple, long-term investments, ignore them most of time, and enjoy a relaxed retirement. That’s my story.

  5. Ingrid Polkinghorne says:

    Thanks for another great, helpful article. I am in the process of leaving my financial advisor. The simplicity lesson is very timely. I tend to make my investments complicated. Hope SF is still enjoyable.

    • Thanks Ingrid. Regrettably the pros have to make it complicated to justify their fees. On rare occasions that might be justified. Mostly not. (We continue to love SF, thanks.)

  6. Outstanding piece, Darrow.

    I can especially relate to the need for changing perspectives as we grow older and (hopefully) wealthier.

    A couple of years ago, at our first Chautauqua, I was walking with Mr. Money Mustache. We were going to buy something, I forget what.

    I said, “What is it going to cost?” I have spent a lifetime being careful about what things were going to cost. I attribute a solid part of my financial success to this.

    “It’s free,” he said.

    “It’s not free,” I said. “They are certainly going to charge us something.”

    “You misunderstand me,” he said. “Once one reaches financial independence, as you and I have, and your investments are throwing off more money than you spend, effectively you can think of everything as being free.”

    This was an “Ah, ha!” moment for me.

    Paying close attention to what things cost helped get me to where I am and, ironically, where I am makes paying close attention to what things cost irrelevant.

    This is very much the same principle as the overflowing-purse-that-replenishes-itself-faster-than-the-gold-can-be-spent as described in the wonderful little book, “The Richest Man in Babylon.”

    • Thanks for the comment and the great story Jim! It’s ironic that we can and should let go of some of the key behaviors that got us where we are, in order to keep growing. In my case, sophisticated financial strategies were never part of the picture. But even frugality can be loosened a bit as we get older. Nothing sadder than a wealthy person who pinches pennies when it comes to their and others’ happiness.

    • I enjoyed “The Richest Man in Babylon”. I valued its parables so much that I gave a copy to my sons and to a niece and a nephew. If they will read it while they are young, it will open their eyes to how to grow financially independent.

      In the past I have use my salary to evaluate how much savings is worth. If I made $20 after taxes, and I had to pay a mechanic $60 including taxes, then if I could do the work in three hours, I should do it. I’m retired now. The equation still hold to some degree but if the complexity is too great, I will let it go to the mechanic, advisor, etc. The other side of the coin on complexity is that if it cost too much I may choose to do it a simpler way. Pretty much in line with what Darrow was preaching.

  7. Excellent post as usual Darrow. You always seem to have practical advice for the everyday person. I especially like the advice “never invest in something you don’t understand”. Just because some are making money in it, does not mean everyone will!

  8. Thank you very much for the article. I couldn’t agree more! I have been very frugal for many years and I have slowly been changing and channeling these efforts to more enjoyable activities. I have long been a fan of Vanguard and their simple index funds. Thanks

  9. I like the idea of two ROTH Iras.
    -In one I hold ‘wealth building stocks’ and will ‘hold them forever,’ reinvesting dividends and splits.
    Ben, EV, TROW, VOYA, ABT, MYL, POT, BNS, TSCO, etc.
    -In the other, I put CEFs selling at a 8-10% discount, using buy-write options, and paying 9-11% dividends.
    This is for building a second income source to wages.

  10. Thoreau says it well

    “I do believe in simplicity. It is astonishing as well as sad, how many trivial affairs even the wisest thinks he must attend to in a day; how singular an affair he thinks he must omit. When the mathematician would solve a difficult problem, he first frees the equation of all incumbrances, and reduces it to its simplest terms. So simplify the problem of life, distinguish the necessary and the real. Probe the earth to see where your main roots run.”

  11. Great stuff – as usual! Thanks for all you do.

    A quick story that sharpened this lesson for me. In our 20’s my wife and I always felt we were not capable of making sense of the seemingly complex world of investing for our future. This insecurity led us to a financial “class” at a local community college. The “teacher” was a local investment adviser/snake oil salesman. Soon we were the proud owners of $10,000 worth of rare coins – three of them to be exact! But it would soon double – maybe even triple – our money! The commission – I learned later – was 25%. About 15 years later I found a buyer – $2500 for all three coins. An expensive lesson in knowing your investment and keeping it simple. I just chock that up as tuition paid in the lessons of life….(-;

  12. Excellent!

  13. Tim in NYC says:

    Irving Berlin was talking to his agent about taking on a certain project. “Why bother?” said the agent. “Ninety-percent of the money you make will go to taxes.” Berlin replied, “I’m an immigrant! I love paying taxes!”

    Berlin also wrote a song titled “I Paid My Income Tax Today.” Google it. Not one of his major hits, but it’s amazing that a paean to the Internal Revenue Service could ever have been produced in this country.

    One unavoidable complexity of course is social security. I’ve just started reading the recent book “Get What’s Yours,” and so far it’s pretty enlightening.

    Thank you so much for this fascinating blog and for your book.

    • Tim, thanks for the interesting aside. Times have sure changed. Agreed, Social Security is an unavoidable complication. And I wouldn’t advise “simplifying” it by just taking it all early, for example. Rather, the claiming decision needs to be analyzed with a powerful calculator using all your personal variables. For most of us, Social Security is too important not to optimize. (I also recommend Mike Piper’s Social Security Made Simple.)

  14. earlyretired says:

    Well written as usual but I need to play devils advocate on this one. I like the idea of simplicity (who doesn’t?). And also agree that reducing complex systems down to their most elementary parts is mankind’s secret for solving untold mysteries. But when it comes to investing and taxes, I’ve always found that digging into the noise almost always puts me ahead of the game. For instance, the simplest approach to investing is to just buy a broad market index fund and balance it with an intermediate term bond fund. Great rule of thumb. Would have worked well over the last 30 years. But what about in the 1950’s which was the last time interest rates reached today’s historical lows? This simple rule of thumb would have lost you 40% (inflation adjusted) over the following 3 decades.

    So now that we know this happened, (and therefore can happen again) what’s a simple man to do today? Blindly stay simple? Or perhaps add some complexity to his portfolio to exploit the many short duration opportunities poised to outperform longer term bond funds?

    Same story on taxes. I’ve tried turning over this chore to “professionals” in the past. Primarily for simplicity. But unfortunately I’ve yet to find anyone who didn’t make at least one mistake, and sometimes multiple. How do I know? Because I studied the tax code (not simple, not fun, but profitable in these instances).

    Bottom line, I’ve been searching for the unicorn named simple for a long time in the investment and tax world. I just don’t think he’s there….

    • Thanks earlyretired. There is surely room for interpretation and debate here. I try to keep in mind Einstein’s dictum: “as simple as possible, but no simpler.”

      On the investing front, I just don’t believe there is a strategy that I personally could/would implement that can outperform simple passive indexing. On the tax front, I’ve had the same experience as you: Several times in my life I’ve handed off my tax returns to “pros,” and was always disappointed. The process ultimately required just as much work from me, by the time I collected and organized all my data for them, then corrected their mistakes! But, ironically, that just reinforced my drive for do-it-yourself simplicity in the tax domain.

      To each his own. I respect that others have a greater appetite/capacity for dealing with complexity, and they will reap whatever rewards are there.

  15. I find the older I get, the less I want to do myself.

    • I agree and since I have the resources to pay someone, I often do that. That means someone who is just starting out or saving for retirement has the ability to do so with the money I pay them. We all benefit!

  16. Very good piece, and thanks for writing this. I’m relatively new to personal finance and this concept is exactly something I’ve arrived at just recently after initially becoming obsessed with planning and research. I hope I can bear this in mind over years and as different events unfold.

    Also it is great to see you nod towards the late, great Harry Browne. Harry was an inspiration in many ways and is missed.

  17. Michelle says:

    Excellent post!

    I’ve been reading as many personal finance/early retirement blogs as I can get my hands on and this post resonates more than most. While I’m determined to master my finances and net worth in as short a time frame as possible, I cannot justify trading one time-consuming exercise (work) for a neurotic obsession with squeezing out every cent from every dollar earned. The older I get, the more appealing it is to strive for simplicity in all areas of life.

    Thanks for the article.

    • Nicely put Michelle! It is important to be frugal. It is important to manage our money wisely. But what would be the point of mortgaging the freedom we’ve achieved to an obsession with the wealth we’ve built? Life is about other things…

  18. Hi Darrow, I enjoy your site because I think it speaks to the average person’s issues more than some other sites I see. I am newly retired and enjoy investing and learning about retirement planning. I guess my bottom line response to simplicity would be that one must find balance. After all had I not been at least somewhat less simplistic I might not have ever found your site or great advice.

  19. Howdy Darrow,
    Where you wrote about your thought process, “But I let it go, costing myself a few hundred dollars each year. Why? Because the associated record-keeping and tax forms required at least several hours of my time annually, much more in mental aggravation.” The way things are going the thought process you outlined may apply to us w/ regard to healthcare.gov. and health insurance via the Healthcare Market Place. This change for us this year is turning into a time sucking misadventure.
    Happy trails, cowboy Mike

  20. Darrow, I am also of the opinion that “less is more” as far as too much financial advice is concerned. A good, low cost all inclusive balanced fund is all that one needs as long as the domestic and world markets are covered in the equity area as well as domestic and world bond markets are covered…..you’re good to go…set it and forget it….it will re-balance itself, and you have more time for the things that you really enjoy doing in your retirement years….they do fly by