“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!