Issue time 7:45 am, by CTreit
Category:personal finance
Happiness leads to good personal finances. (Wait, it’s not the other way around?)
July 20th, 2010A little while ago I attended a bar mitzvah, the coming of age celebration for young Jewish “men” aged 13 years old. The officiating rabbi quoted one of the old sages who said something like this when his life was coming to an end, “I have been lucky in my life. I only wanted things when I actually had them.”
The attitude of this sage is relevant for personal finance, I’d say. I cannot say for sure how well this sage had his finances in order, but I am pretty certain that he was not rich and that he did not own all kinds of things like we in the U.S. do in this day and age. We are lead to believe that having things, that showing off a big house, driving a nice car, going to exotic places, etc., are the most important goals in life. Alas, economic statistics tell us that most of us fail in this endeavor anyway. But it kind of has to be that way, doesn’t it? Think about it – if everyone travels to exotic places, the places would cease to be exotic, wouldn’t they? If everybody could drive a nice car, the nice car would become the average car and would no longer be called “nice.” It’s the exclusive idea behind the “exotic” place and the “nice” car that matters.
As we pursue dreams of material wealth and “financial independence,” many of us get caught up in the “rat race” – hustling for more money, keeping a job that makes us miserable, getting stuck in aggravating commuter traffic every day… And for what? It is not as if each of us doing all this means we all attain these lofty goals of material wealth and financial independence.
What should we do instead? There is only one thing that really matters. Focus on having a good life. Make every day count in your life. Let yourself have good days at work and at home.
Having good days also means that you want to avoid financial stress. When you focus on having a good life, you very well will find out that things for which you spend money won’t make you that happy. As you spend less money on things, your personal finances will also improve even though you did not even make an effort to make them better. You only had to focus on having a good life. It is really that simple.
Perhaps you know this better-known quote about happiness – and I’ll end this post here – “Happiness is not having what you want. It is wanting what you have.”
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Issue time 9:07 am, by CTreit
Category:Retirement_Calculator
Your life expectancy is never zero
July 15th, 2010This is the fourth post in a series on “obvious and hidden financial risks.” (To read the other posts, please go to “market risk”, “reaching financial goals risk”, and “purchasing power risk”.)
We mentioned one risk in the list of financial risk that is really not a financial risk in the narrow sense, but it does have tremendous financial consequences. We are talking about longevity risk.
As if life and finance were not complicated enough already, there is an important risk that comes into play when you consider one of the most important plans you must make for your future: your retirement plan. Over the last few decades medical advancements and great improvements in knowledge about self-care (like the risk of smoking, or failing to eat well and get sufficient exercise) have allowed us to live longer than ever before.
When you plan for retirement it is important to take into consideration the risk that you may live longer than expected (also known as “longevity risk”). Many people do not expect to live as long as they actually will, and that might keep you from planning well. But you do not want to run out of money in the last few years of a long life.
Unfortunately, it is very difficult to assess longevity risk and account for it properly. There are a number of websites on the internet that have calculators that can help you figure out your life expectancy. They assess how your lifestyle and medical history may impact your life expectancy, and adjust the estimated years left to your life, accordingly. Perhaps these sites can help you make more informed decisions about your plans to retire. Check out the links below to see what offerings are out there to help you better assess your longevity risk.
Another interesting thing about longevity and your life expectancy is the fact that it is never even close to zero. For example, an 80-year old male has a life expectancy of almost 7 years. His 80-year old wife can expect to live for another 9 years! I suppose these calculations reflect the idea that when you have made it this far, you have a good chance of making it even a bit further.
Longevity risk is one of the few risks that you’d probably not want to avoid! Who wants to purposely shorten their lifespan? In the contrary, we humans have spent a lot of effort to increase longevity risk and I am happy with that. I just hope that we do what we can to make adequate provisions for a (surprisingly) long life and don’t forget to enjoy every precious minute of it.
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http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html
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You can find weekly lists of great blog posts written by personal finance bloggers at the Carnival of Personal Finance. We are happy to report that our post Obvious and Hidden Financial Risks was published in the Carnival of Personal Finance hosted by Funny about Money.
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Issue time 8:44 am, by CTreit
Category:Financial Goals
What to do about the risk of not reaching your financial goals?
July 13th, 2010This is the third post in a series on “obvious and hidden financial risks.” (To read the other posts, please go to “market risk” and “purchasing power risk”.)
As you may know or guess, setting financial goals and establishing plans to reach them are probably the most important financial undertakings you will make in your lifetime. For example, saving for retirement is the best way to ensure your future. The goal there is to have enough savings accumulated to make your final years as pleasant as possible. You might also want to save for big-ticket items like homes, or educations for the next generation. Regardless, you want to maximize the number of dollars available at the time you’re ready to spend them, keeping in mind the limit of your tolerance for taking market risk.
Of course, you want to use the savings strategy that makes the most of your money – but to do this, you have to also balances the various risks involved when saving for a goal. Many people would rather “be safe than sorry.” For example, you may want to avoid investing in stocks, let’s say. But there’s always the chance that not investing may increase the risk that you might not reach your long-term financial goals. You should consider exposing yourself to market risk because investing in the stock market over the long run makes your dollar savings work harder to bring in even more dollars to get you closer to your financial goals. One can be so “safe” that you end up sorry you didn’t take more risks and let your hard-earned money earn more money!
Alternatively, some people tolerate risks better than others. Now, it is also entirely possible that choosing to invest your money and take on more risk moves you even farther away from your financial goals. Things can go so bad that you even have to abandon your financial goals entirely: no new house, no new car, no retirement or delayed retirement. That would not be a good course to take.
How do you reduce the risk of not reaching your financial goals? Know your facts. Over the long run, the stock market goes up or at least stays even. Over the short run, the market is far less predictable. Keeping this knowledge in mind will reduce the risk that you do not reach your goal. So, if your goal is far enough in the future, put some of your money dedicated to that goal into the stock market. This way, you take advantage of long-term upward trends in the market.
If you need to reach your particular financial goal in the short term – meaning within a few years – then stay out of the stock market. You’ll avoid market volatility and keep your money safe. Said another way, to overcome volatility in the market, you need to stay in the market for time long enough to recoup any losses you might have. If you only have a short time to save, and your investments go down during that short period, you may not have enough time left to recoup your losses. So use your time wisely (whether you have a lot or a little!), and you’ll be more likely to reach your financial goals.
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