Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Tuesday, August 04, 2020

How to Be Wealthy

Can money buy happiness? Tom Rath and Jim Harter, authors of the book Well Being, say it can. I have often thought about what it means to be wealthy. Why is a $400,000 enough for one client, while another needs $3,000,000 and yet another doesn't think winning the lottery is enough. Being wealthy is to have financial well-being, which looks different for different people. This book put into words my thoughts about wealth, and how money can buy you happiness.

I rarely write in books - but this one called for my special multicolored pencil.

So what is financial well-being? First, you must have enough money to address your basic needs of food, clothing, shelter and healthcare. Beyond that, money can make you comfortable and gives you control of your time. Financial well-being is intimately tied to your satisfaction of other areas of your life.

The more money you have, the more you can spend, but not all spending is equal. The book cites studies that show spending on others or giving to charity leads to greater satisfaction than spending on oneself. Spending on experiences is superior to spending on material purchases. Experiences lead to "decades of fond memories" while material items "lose their novelty" and "our satisfaction with material goods decreases over time."

Financial well-being is not measured by dollars saved or possessions gained. Financial well being isn't money in the bank, but the freedom and lack of worry that that money brings you. This is why "enough" is different for every client. While the money to satisfy their needs is different, the need for satisfaction is the same.

We get trapped by our own ideas of wealth. While having a higher income, more dollars in the bank, or bigger and better stuff than our neighbors can make us feel superior, this thinking only leads to a cycle of disappointment. We get trapped keeping up with the Joneses as they get a shinier car or fancier home remodel. If we focus on a dollar amount as the goal, we keep moving the goal posts. If you thought a million dollars would make you happy last year, now you won't be satisfied until it's two million.

The authors call this the "comparison dilemma." This is one place where your financial well-being overlaps with your career and social well-being. If you are comfortable and confident in your social relationships, and proud of your friends achievements, you are less likely to be jealous and judgmental of them. If Mr. and Mrs. Jones next door put in a new pool, hopefully you will bring over a pitcher of margaritas and share their joy - not waste money on your own pool. If you are fulfilled and engaged in your job, you will be less likely to be casting your resume elsewhere, fishing for a higher salary. Once your basic needs are met by your salary, your work can engage you on a deeper level.

How do we attain financial well-being? A great place to start is by automating your financial life. Regularly depositing money and investing for long-term growth is a powerful tool for building wealth. Working with a professional to answer your biggest financial questions eases the daily stress that money can bring and gives you confidence in your financial future.

So why doesn't winning the lottery make people happier? One possibility is that they spend the money down too quickly. If material possessions are not what that person truly valued, the effect would wear off. Lottery winners may get stuck in a cycle of comparing themselves to others or their own ideas of wealth. If you are not satisfied in other areas of your social, professional or physical well-being, money isn't going to fix all of your problems.

As the authors say:
People with thriving Financial Wellbeing are satisfied with their standard of living, don't worry about money in their everyday lives, and have confidence in their financial future. They give to others and don't just spend on themselves. As a result of managing their money wisely, they have the financial freedom to spend even more time with the people whose company they enjoy best.
  1. Wealth is financial well-being: Having the money to be comfortable and being able to control your own time.
  2. Spending on others, charities and experiences can bring lasting satisfaction.
  3. Automating your finances and working with a professional grow your wealth while you enjoy your life.
  4. Anyone can be wealthy if what you have brings you satisfaction.

Wednesday, July 29, 2020

When Should You Call a Professional?

Every summer, something goes wrong with my air conditioner. Two years ago, the repair man rewired my thermostat. Last summer, he replaced the control panel on the furnace. This summer when he came out, we were both at a loss as to what was happening.

For a while, I could make the air conditioning work just by hitting the side of the outside compressor unit. That was not a permanent solution, however. With the outside temperatures getting into the high 90's, and the inside not far behind, I had to do something.

While working from home, I decided to use my former commute time to try to solve the puzzle.

Since hitting the compressor made it come on, I surmised that is where the problem lay. There are only a few pieces of the puzzle once you open up the compressor, and I quickly saw that the contactor wasn't working properly. AC takes a lot of electricity, and the contactor is the switch in between the thermostat and the compressor. I found the part online and paid extra for the express shipping.

New Contactor - Do I have AC?
New contactor - do I have AC?

A few days later, I installed the new part and ... nothing. All Saturday morning was spent on the phone with an electrician trying to diagnose the issue. Ultimately, this led me to a break in the wire leading from the thermostat to the compressor. I just needed to run a new wire.

After running the new wire, I needed to replace a fuse in the attic. Did I mention it was 100 degrees outside? It may as well have been 200 degrees in the attic. Finally - the house started to cool!

Did I mention the temperature?
If this was a video, you would see the sweat streaming down.

I wrote myself an invoice:
  • $31.62 for a new contactor
  • $17.73 for new wires
  • $20.82 for a wire stripper, connectors and a new fuse
  • Countless hours researching possible solutions.
Value of doing it myself? Questionable.

Doing household projects myself can be fun, can give me a sense of accomplishment, and in some cases, can save me money! Hiring a professional to do the job, however, saves me time, frustration and ensures that the job is done well. In this case, I may have saved a few dollars, but I paid in frustration and lost time for a second rate job.

So, last weekend when the washing machine backed up, I took a minute to stare at the pipes ... and called the plumber.

Just Desserts

Today, Ken and I start a diet. The months of isolation and comfort food have taken their toll. Yes, we’ve been walking every day, but it would take a marathon a week to shed the extra calories from our stress eating.

And we are each other’s worst enemy when it comes to food. Each evening, one of us looks at the other and says, “What would it take to talk you into ice cream/pizza/frosties?” The answer is very little. A week or so ago, we headed to Wendy’s for our evening fix. We were determined to ONLY get the little junior frosty. Just a little something cold in this heat. Just a little chocolate to appease our taste buds. Didn’t we deserve just a LITTLE something?

So we got in line at the drive-thru. Forty-five minutes later, we placed our order. Time in the time of corona has little meaning when the pay-off is a frosty. We pulled up to the window with outstretched hands only to hear, “Sir, our frosty machine is broken.”

Better people would have said, “Well that’s our sign.” Better people would have driven home sensing some divine intervention in our diet. But we are not better people. We are people who have been holed up for months, grasping for some LITTLE bit of happiness to get us through another day of a raging pandemic. We drove to Baskin Robbins.

May you find comfort in the LITTLE things, and may you do whatever it takes to get through another day in a raging pandemic.
Stay safe.

Tuesday, July 21, 2020

Going Their Separate Ways

Every afternoon as I drive home (or, listen to a podcast after working from home!) I hear about how the "stock market" performed that day.

In the US, there are at least thirteen "stock markets" or exchanges, plus many more bank operated platforms, where stocks are traded. While stocks are traded on exchanges, they generally aren’t grouped or tracked for performance by exchange. When you hear performance being quoted, it is commonly by “indices” or groups of stocks with some defining characteristic. Popularly quoted indices are the Dow Jones Industrial Average, the S&P 500 and the NASDAQ. Each of these tracks large US companies, but each in its on way:
  • The Dow consists of only 30 stocks, hand selected by a committee in an attempt to cover the entire US economy in a meaningful way. The measurement is based on the share price of the constituent parts. That weighting is a weird feature on it's own, so a large price movement in one of the companies has an outsized impact, even if it is a smaller component.
  • The S&P 500 is generally the 500 largest stocks in. In this way, it covers about 80% of the market in the US. Stocks are weighted proportionally to their size or market capitalization. This means that the larger companies have a larger influence on the index level.
  • The NASDAQ 100 is strictly the 100 largest non-financial companies listed on the NASDAQ stock exchange. There are some limits to the how large of a weight that a single company can be in the index, so while generally the larger the company is the greater the influence, it is not a strict 1:1 correlation.
Notably, all of these indices focus on large US companies. In general, the more similarities companies have, the more correlations they will have. If everyone is excited about finding a vaccine to Covid-19 (they are), then generally all biotech companies will benefit. If the market and business climate is good for oil companies (it isn't), Exxon and Chevron will both benefit. In general, if the investing, business and economic climate is good for large US companies, then as a whole, large US companies will perform well. the Dow, S&P 500 and NASDAQ-100 indices generally rise and fall together, albeit, at different rates and with different underlying stocks and rules.

So what is happening today? It just so happens that the largest stocks in the NASDAQ index are down. While a lot of these companies are also in the S&P 500, the other sectors of the S&P 500 are doing well enough to keep it in the green. 

While the NASDAQ-100 and S&P 500 both share a lot of top companies, the NASDAQ is more focused on consumer discretionary, biotech and business technology companies. Those are just doing poorly today. The S&P 500 on the other hand has financial, energy and consumer staples which are doing particularly well today.

High growth tech companies have done very well this year, and the rest of the stock market is catching up today.

Thursday, July 16, 2020

Theory of Relativity

Every Thursday we get data on the number of new unemployment claims. That number has never carried more weight than now. Today’s number is 1.3 million. That’s another 1.3 million people who have been laid off or have lost income. It’s added to continuing claims to show that an awful lot of people are now unemployed, about 30 million. But this is a weekly number. And it’s all relative.

While the normal weekly number is in the 200,000 range, this is not a normal time. With a shutdown, we expected big numbers, and employers did not disappoint. This week’s number IS lower, but it’s only 10,000 people lower. We expected the number to be 1.25 million.

And this reported number doesn’t count people who are filing under the federal program which allows self-employed and contractors to apply. That group represents about another million people, making the total 2.43 million in NEW claims.

Relatively speaking, the weekly claims are declining and possibly bottoming out. But it’s a weekly number and can be quite “noisy.” That means we depend on the trend line. The 4 week moving average is now 1.375 million. That’s a drop of 60,000 people per week. Good news?

It’s all relative. Yes, we appear to be slowing down on job losses, maybe hitting the bottom. But the greatest number of new claims came from 3 states: California, Florida, and Georgia. All those relatives spreading the virus have resulted in spikes in cases and new limits on business activity and group gatherings. So here we go again.

What will next week bring? While markets said “meh,” to this week’s data, any increase in this number will result in a pause. An upward trend in unemployment could really cause investors to pull in.