THERE ARE CERTAIN hallmarks of financial rectitude: Never carrying a credit card balance. Maxing out the 401(k). Having an emergency fund. But do these habits deserve the sacrosanct status they’ve achieved? You won’t find me arguing with paying off the credit cards each month or putting at least enough in a 401(k) plan to earn the full matching employer contribution. Both make ample sense. But in the past, I’ve raised questions about how much emergency money people need and how they should handle this money. Every time, I get an earful from readers, alarmed by my financial sacrilege. I recently stumbled into this controversial territory again, when I suggested that—once retired—folks may not need an emergency fund. Has the man gone completely mad? At the risk of further inciting readers, let me offer three contentions. 1. An emergency fund is really an unemployment fund. If we’re out of work for an extended period, we could easily run through tens of thousands of dollars, which is why the standard advice is to keep emergency money equal to three-to-six months of living expenses. What if we’re retired? Unemployment is no longer a risk, so an emergency fund may be unnecessary. But what about the other emergencies that people cite—things like replacing the roof, repairing the car, needing nursing home care and paying large medical bills? I’d argue that either these things aren’t true emergencies or the potential financial damage isn't all that great. For instance, we know the roof will need replacing at some point, so it isn't really an emergency expense. Rather, it's a known upcoming cost and we should simply save the necessary money. Similarly, we ought to have a plan for nursing home costs before we quit the workforce. That plan might involve paying out of pocket, perhaps with help from long-term-care insurance. Alternatively, we might accept that we’ll deplete our assets and then fall back on Medicaid. What about a car repair? It ought to cost less than $1,000 and, if it’s more, it probably means we had an accident, at which point insurance should kick in. Ditto for medical bills. They should be largely covered by insurance. Indeed, as we ponder how much cash we need easy access to, we should give some thought to deductibles, elimination periods and maximum out-of-pocket expenses on our various insurance policies. For instance, under the Affordable Care Act, the 2018 maximum out-of-pocket expenses on a health insurance policy are $7,350 for an individual and $14,700 for a family. 2. Emergency money is typically dead money. It sits in a money-market fund or savings account, earning an after-tax interest rate that is typically below the inflation rate. This is not a desirable situation—which means we should carry as little emergency money as we can get away with. To that end, we should focus not on how much cash we ought to hold, but on how much we need access to. For instance, if we have a $100,000 home equity line of credit, we may be comfortable holding far less emergency money. Because emergency money typically earns such a low rate of return, I also question conventional wisdom, which argues that building up a large emergency fund should be the top priority for young adults entering the workforce. At that juncture, we typically have modest salaries, but a wonderfully long time horizon. Wouldn’t it be better to focus instead on funding retirement accounts, thereby getting long-term compounding working to our advantage? If young adults later find themselves unemployed, they could always pull their original contributions out of their Roth IRA, with no taxes or penalties owed. They could even cash in their 401(k). Sure, that would trigger taxes and penalties. But if the 401(k) had paid an employer match, often folks will still come out ahead financially. 3. A separate emergency fund may be unnecessary. As our wealth grows, we’ll likely accumulate other savings in our taxable account. Let’s say our taxable account holds $100,000 that we've earmarked for retirement. Do we really need a separate $20,000 for emergencies? If we lost our job, why wouldn’t we just dip into the taxable account jar we’ve mentally labeled “retirement”? True, that retirement money might be invested entirely in stocks and, when we need to sell, those stocks might be in the midst of a bear market. But even as we sell stocks at depressed prices in our taxable account, we could shift an equal sum from bonds to stocks within our retirement account. Result: We would maintain our portfolio’s stock exposure—and effectively sell bonds to pay for our emergency. Follow Jonathan on Twitter @ClementsMoney and on Facebook. [xyz-ihs snippet="Donate"]

THE PLOT, THE SCRIPT and the characters may have changed. But we’ve seen this movie before. The current stock market swoon strikes many folks as unprecedented: It’s the frantic financial sideshow to a devastating global tragedy—one that’s seen 1.1 million people fall ill and 60,000 die, with every expectation that the numbers will be many multiples worse before the COVID-19 pandemic is over. Yet, on closer inspection, 2020’s bear market doesn’t seem so different from earlier market declines. Once again, we’re being reminded of some crucial facts of financial life. Here are seven of them: 1. Our risk tolerance isn’t stable. Rising share prices turn us into fearless stock jockeys, while tumbling prices reduce us to cash-loving cowards. What about “buy low, sell high”? At times like this, investors toss such basic commandments out the window. Indeed, I’ve been fielding panicked emails from readers for the past month. I tell folks to think about what sort of portfolio they would feel comfortable holding today and then, once the stock market recovers, they should build that portfolio. But guess what? It’s advice I’m 100% confident will be ignored. Many of these folks will sell stocks now, only to renew their embrace of risk when the market is hitting new highs. 2. Losses wreak havoc with compounding. If you had invested $100 on Feb. 19, when the S&P 500 notched its all-time high, you’d have been down 34% to $66.08 by March 23. That’s when the S&P 500 hit its recent low. What will it take to recoup that 34% loss? To go from $66.08 to $100, you need a 51% gain. As of yesterday’s market close, we’ve clawed back 11%. I’m confident we’ll eventually recoup the rest. Still, this highlights the brutal impact of losses on investment compounding. Don’t want it to be so brutal? You can avoid far steeper losses by diversifying broadly and keeping at least some money in bonds and cash investments. You can also speed your portfolio’s recovery by rebalancing during the market decline and by adding fresh savings to your stock portfolio. 3. In Treasurys, we should trust. During 2008’s financial crisis, Treasury bonds posted gains, while almost everything else lost ground. It was yet another lesson many folks failed to learn. Indeed, in the hunt for something that’ll post gains when stocks are suffering, many investors stubbornly ignore Treasurys, while embracing all manner of costly, complicated and unreliable alternatives. Among them: hedge funds, “liquid alt” mutual funds, real estate funds and bitcoin. I’ve largely soured on alternative investments, with the exception of gold stock funds. And even gold stocks require a remarkably strong stomach for volatility. Still, they have once again proven their mettle (pun intended) at a time of market mayhem. 4. Bonds are less risky than stocks—except when we go to trade. Many investors are scratching their head over the recent bond market weakness, which saw steep short-term losses among municipal and corporate bonds. What went wrong? A key problem: The bond market is far more fragmented than the stock market. For instance, Vanguard’s Total Stock Market Index Fund tracks the CRSP U.S. Total Market Index, which contains 3,500 stocks. By contrast, Vanguard’s Total Bond Market Index Fund tracks the Bloomberg Barclays U.S. Aggregate Float-Adjusted Index, which includes more than 11,000 bond issues. And that’s just the tip of the iceberg: There are an estimated 30,000 U.S. corporate bond issues outstanding and a million different municipal bonds. With so many issues on offer, it’s hardly surprising that—when investors and market makers get spooked and become reluctant to buy or sell—the bond market doesn’t function so well. 5. If we wait for stocks to get cheap before buying, we’ll likely wait an awfully long time. After 2020’s brutal first quarter, you might imagine that U.S. stocks would appear cheap based on yardsticks like dividend yield, price-to-earnings (P/E) multiples and cyclically adjusted P/E multiples. And shares are indeed cheaper, but they’re hardly bargain priced by historical standards. Of course, we may get there yet, but I wouldn’t count on it. Even if share prices fall further, we’re likely to see disappointing corporate earnings and cuts in dividends, which may conspire to make stocks look more expensive, not less. On top of that, stock market valuations have been trending higher over the past four decades. That trend, I suspect, won’t ever reverse. 6. To earn handsome long-run returns, we must run the risk of severe short-term losses—and those losses occur with brutal regularity. Over the past 50 years, we’ve had the 1973-74 stock market crash that accompanied the OPEC oil embargo, 1977’s market decline, the early 1980s stock market swoon born of skyrocketing inflation and a double dip U.S. recession, 1987’s harrowing market crash, the 1990 slide triggered by Iraq’s invasion of Kuwait, 1997’s Asian Contagion, the 2000-02 slump unleashed by the dot-com bust and the 9/11 terrorist attacks, the 2007-09 crash driven by the Great Recession, 2018’s losing year and 2020’s coronavirus crash. The bottom line: Big market declines happen at least once a decade, and yet we’re shocked—shocked!—every time. To grasp the stock market’s turbulence, check out the annual returns for the S&P 500. The frequent losses may strike some as unnerving, but I’m comforted by looking at the year-by-year results. I remember so many of these declines, including the anguished declarations of doom, and yet every one of them proved fleeting. 7. If an investment offers high expected returns, there must be high risk—even if we can’t figure out what that risk is. When the S&P 500 was at its all-time high just over six weeks ago, I suspect the vast majority of investors knew that owning stocks was risky, even if they didn’t fully appreciate the magnitude of that risk. After all, even when stocks are rising, it’s hard not to notice the day-to-day turmoil. Instead, I suspect today’s most surprised investors were those who loaded up on rental real estate. In particular, I think about the folks who took out large mortgages to buy apartments and houses, and then aimed to cover their borrowing costs with short-term rental income from customers of Airbnb, Vrbo and similar services. It might have looked like easy money (or somewhat easy, given the work involved in cleaning up after short-term tenants) and less risky than being the landlord of a single tenant, who might fail to pay the rent and prove difficult to evict. But as we’ve discovered, there was a serious risk—the risk that the entire world would hunker down at home and stop traveling. Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Money and Me, 27 Things to Do Now and Fear Not. [xyz-ihs snippet="Donate"]

WHEN I WAS IN COLLEGE, late in the evening and usually after a few drinks, someone would often play Edith Piaf’s Non, Je Ne Regrette Rien, her stirring and defiant 1960 song about regretting nothing. It’s a sentiment worth recalling as we look back on our financial life. Here are four things we shouldn’t regret: Saving too much. Is that really something to regret? It’s undoubtedly better than the alternative: saving too little. While lifestyle improvements often fail to deliver much happiness, a sharp decline in our standard of living—perhaps triggered by inadequate retirement savings or a job loss coupled with a skimpy emergency fund—would almost certainly hurt. That said, if we spend our life saving voraciously, we might regret our sacrifice if we get scant pleasure from the money we amass. This doesn’t mean we ought, at some point, to start spending with wild abandon, though opening our wallets a little wider strikes me as a fine thing to do. But there are also other ways to get pleasure from our savings. For instance, we might use our money to help others, perhaps making financial gifts to family members or supporting our favorite charities. We might also choose to hang on to our savings and enjoy the sense of security that money bestows. I’ve come to believe that the pleasure that comes with being generous and from feeling financially secure often exceeds the pleasure that comes from spending. Diversifying. Ever since I got religion about sensible investing and started diversifying broadly, I’ve found myself owning parts of the global financial markets that have generated lackluster returns for a decade and sometimes longer. Think about the poor performance of U.S. stocks in the 2000s and that of foreign shares in the 2010s. [xyz-ihs snippet="Mobile-Subscribe"] This is not something I regret. Obviously, if I knew with certainty that tech stocks would sparkle in the 1990s and 2010s, and stink bigtime in the 2000s and also in 2022, I would have invested accordingly. But without such clairvoyance, I take what strikes me as the only prudent course of action, which is to own a little bit of everything. Funding retirement accounts. I’ve lately seen a spate of comments from retirees bemoaning the amount they stashed in traditional tax-deductible retirement accounts, and the big tax bills that are now coming due as they draw down these accounts. These retirees suggest that Roth accounts would have been a better choice—and that even a regular taxable account would have been preferable. But this smacks of financial amnesia. How so? It ignores the earlier tax deduction that likely compensated largely or entirely for the later tax bill. If you’re in the same tax bracket when you fund a traditional retirement account as when you draw it down, you effectively get tax-free growth, just like you would with a Roth. To understand why, read this explanation. But what if you end up in a higher tax bracket in retirement? In that scenario, a Roth would have been the better bet. But what about a regular taxable account? Suppose you’re age 25, and your combined federal and state income-tax bracket is 15%. You invest $10,000 in a tax-deductible retirement account that grows at 8% a year. Forty years later, at age 65, you empty the account, paying a combined 25% income-tax rate on the proceeds. Result: You’d net almost $163,000. What if, at age 25, you skipped the tax-deductible retirement account and instead stashed the dollars in a regular taxable account? Right off the top, you’d lose 15% to taxes, leaving you with $8,500 to invest. The money again grows at 8% a year. Let’s be (absurdly) optimistic and assume you paid no taxes along the way—because you received no dividends and realized no capital gains. At age 65, your taxable account would be worth close to $185,000, with a cost basis of $8,500. You then cash out the account, paying taxes at a 15% capital gains rate. Result: You’d be left with some $158,000, or $4,700 less than if you’d stuck with the tax-deductible retirement account. What if we used more realistic assumptions? The taxable account could easily have fallen short by $30,000 or more. Owning insurance. I haven’t submitted an insurance claim—other than to my health insurer—in the past three decades. Does that mean carrying life, auto, homeowner’s and umbrella liability insurance has been a waste of money? Hardly. I paid my premiums to protect against a host of financial risks, I got the peace of mind that the insurance provided—and I’m happy none of these risks came to pass. The case for carrying insurance is similar to the case for diversifying. We’re protecting against the unknown. More things can happen than will happen—and, when it comes to the sort of things that good insurance covers, the financial consequences of not having coverage can be devastating. In the absence of a crystal ball, we need to manage risk so we aren’t hurt financially if our home burns down, our neighbors sue us, we need major medical care or some other costly misfortune strikes. That’s what our premium dollars buy and, if we have the right coverage, it’s money well spent. Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles. [xyz-ihs snippet="Donate"]

IF MONEY ISSUES HAD the urgency of a broken air-conditioning system on a 100-degree day, we’d all be in great financial shape. But all too often, financial troubles are years in the making. We bumble along, vaguely aware that things aren’t quite right. Sure enough, one day, the red lights are flashing and the alarm bells are ringing. But by then, it’s usually way too late to fix the problem—because the fix required taking action years earlier. Consider seven examples: 1. Living precariously. This may not be an issue for HumbleDollar readers, but it’s a big issue for most Americans. All too many families live paycheck to paycheck, with little or no financial safety net. We’re talking about folks such as the 37% of Americans who can’t handle a $400 financial emergency. One result: When the economy shut down earlier this year and unemployment spiked to 14.7%, millions of Americans immediately found themselves in dire financial straits. I appreciate that those on the lowest incomes find it hugely difficult to save. But for everybody else, I wish there was greater thought given to the tradeoff between spending on baubles today and not spending so we’re better prepared for tomorrow. The baubles will provide only fleeting pleasure, while money in the bank can deliver an enduring sense of financial security. 2. Punting on retirement. Paying for retirement may be our final financial goal, but we should make it a priority from the day we enter the workforce. Why? If we’re aiming to retire at, say, age 65 with today’s equivalent of $1 million and our portfolio earns three percentage points a year more than inflation, we need to save an inflation-adjusted $11,700 every year if we start at age 22. What if we wait until 35 to begin saving? The required annual sum soars some 80% to $21,000. 3. Failing to diversify. Risk isn’t what happens, but rather what could potentially happen. If we own a lopsided portfolio—one that’s heavily skewed toward our employer’s stock, or to health care companies, or that includes only U.S. shares—perhaps all will be fine and we’ll roll along merrily for years with no ill effects. But maybe our luck won’t hold. What if our employer turns out to be the next Enron, or health care is nationalized, or the U.S. suffers a malaise similar to Japan? This is a reason to own a globally diversified portfolio, preferably one built using total market index funds. 4. Overlooking inflation. Over the past decade, inflation has run at a modest 1.7% a year. That hardly seems worth worrying about and, in any given year, that’s probably the right reaction. Yet the longer-term consequences could be dire. Suppose we favor cash investments and high-quality bonds. Based on today’s yields, there’s a decent chance our money won’t grow once inflation and taxes are figured in. What if we’re retired with a fixed monthly pension? After 25 years of 1.7% annual inflation, the spending power of that pension would be slashed by 34%—which is why we might also want to own some stocks, so we have a pot of money that has a decent shot at growing faster than inflation. 5. Discounting longevity risk. Many folks are aware that, at age 65, they can reasonably expect to live another two decades or so. What they fail to appreciate is how much variation there is around this median. Roughly speaking, a quarter of retirees won’t make it to age 80—but another quarter will live to their early 90s or beyond. But where will each of us fall within this range? We won’t find out until we get there, which is why relying on average life expectancies is so dangerous. I hate to sound callous, but dying early in retirement is not a financial risk. In fact, at that juncture, all of our financial problems would be over. Instead, the big financial risk is living far longer than average and potentially exhausting our savings, hence my fondness for delaying Social Security to get a larger monthly check and buying immediate fixed annuities that pay lifetime income. 6. Ignoring long-term care. Among seniors, 44% of men and 58% of women will need long-term care (LTC). But it usually isn’t for that long, with stays at an LTC facility averaging less than a year for men and less than a year and a half for women. Still, a minority of seniors will spend many years in a nursing home—and the cost is potentially astronomical. To be sure, there’s an element of moral hazard here: If we don’t have a plan for covering LTC costs, we can always fall back on Medicaid. But that will mean first spending down much of our wealth, plus we’re more likely to end up in a low-rated facility. Don’t like that idea? We might decide we can shoulder the cost on our own, assuming we have a seven-figure portfolio. We might opt to buy LTC insurance, either the traditional or the hybrid variety. Or we could plan to apply for Medicaid, in which case we might want to give away a chunk of our money years before. Whatever the case, we should probably be thinking about how to handle LTC costs in our 50s—more than two decades before we’re likely to need long-term care. 7. Avoiding estate planning. There’s a good chance that death will arrive without much warning—and, to the extent we know our demise is imminent, we probably won’t want to spend any of our remaining days meeting with a lawyer. The upshot: We should get that will and those powers of attorney drawn up today. We should check those beneficiary designations. And, for both our own sake and the sake of our heirs, we should get our financial affairs in order. Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Next Year Foretold, Dialed In and Ain't Everything. [xyz-ihs snippet="Donate"]

I LOVE CORRESPONDING with readers, because I find out what’s on ordinary investors’ minds and hence what might make for a good article. And, occasionally, I learn something unexpected. This week’s lesson: The potential return on EE savings bonds is much higher than I thought. If you look on TreasuryDirect.gov, you’ll learn that the current interest rate is a meager 0.3%. After 20 years, that would give you a cumulative total return of just 6.2%. Factor in 2% inflation, and the spending power of your money would shrink by almost 29%. But check out the fine print. On EE bonds, the Treasury guarantees that—if you don’t double your money after 20 years through the regular interest payments—it’ll make a onetime adjustment at the 20-year anniversary, so your cumulative return leaps to 100%. That’s equal to 3.5% a year. A guaranteed 3.5% a year sounds pretty good. But remember, your annual return will be just 0.3% if you cash in before 20 years, and even lower if you sell in the first five years and pay the penalty equal to three months’ interest. Still, EE bonds aren’t quite the atrocious investment I imagined and, for super-conservative investors, could even be a reasonable choice. [xyz-ihs snippet="Donate"]

IT SEEMS ONE IS NEVER enough. I've known folks who collect handbags, wine, Mark Twain first editions, pennies, vintage posters, Pez dispensers, old cars, British royal family memorabilia, antique furniture, lunch boxes, motorcycles, Beanie Babies, Portmeirion china and more. Near where I live is the Barnes Foundation, which houses Albert Barnes’s art collection, with its 181 paintings by Pierre-Auguste Renoir. Doesn’t that seem a tad obsessive? Most of us, I suspect, would be content with just three or four Renoirs. I thought that maybe millennials—the Ikea generation purportedly more interested in experiences than possessions—would be less inclined to become collectors. But after asking around, I’m not so sure. It seems baseball cards are still a thing and, perhaps more surprising, so too are Pokemon cards. Why do we collect? All kinds of explanations have been offered. Perhaps a collection is a way to signal our worthiness as a mate by proving our ability to amass resources. Maybe it’s a way to show our loyalty or to bring some order to our otherwise chaotic lives. Perhaps it reflects a craving for immortality because our collection might live on even after we shuffle off this mortal coil. Sigmund Freud, apparently, thought the urge to collect was triggered by the trauma of improper toilet training. Based on all the collecting that’s going on, it seems improper toilet training is rampant. Frankly, I don’t see much wrong with collecting, as long as it doesn’t turn into hoarding and it doesn’t break the bank. For collectors, there’s obviously a thrill to the chase. But it's worth pondering how the chase will end. As with almost everything, there are diminishing returns. I own four paintings by Robert Kipniss. I used to live in an apartment next to his studio, and we’d occasionally chat in the hallway and the building’s gym, so his work has added meaning for me. Still, would a fifth painting bring the same thrill as the first four? Almost certainly not. When I was a teenager, I used to collect stamps, a hobby I shared with my grandfather, whom everybody called Clem. When Clem died 34 years ago, I inherited his stamp collection, which I’ve been lugging around ever since and which today fills two cardboard boxes in my basement. I doubt I’d get much if I tried to sell the collection and, in any case, it feels wrong to let that piece of him go. On the other hand, if I don’t deal with the stamp collection, I'll be bequeathing that burden to my kids. [xyz-ihs snippet="Mobile-Subscribe"] As I see it, we’re all part of a conversation that began long before we were born and will continue long after we’re gone. We’re influenced by the past and, in some small way, we’ll influence the future. That’s why it’s so important to be thoughtful about our words and our actions. And perhaps also our stuff—because at least some of it will outlive us. For earlier generations, wealth was measured in things: silver cutlery, bone china, fine furniture and, of course, land and houses. But today, much of the world’s wealth consists of stocks and bonds. More recently, we’ve seen a move to ascribe value to digital assets like cryptocurrencies and nonfungible tokens. I’m no fan of bitcoin and NFTs, but it’s a sign of where the world’s headed. There's less interest in things, at least as a store of wealth. That doesn’t mean folks shouldn’t collect stamps, coins and antiques. But it’s worth asking, will my heirs want what I’m buying today? No, not every purchase we make should include a consideration of future generations. But it’s another way of forcing ourselves to consider whether this is something that will have lasting appeal—not just to others, but also to ourselves. I think I’ll continue to enjoy my Kipniss paintings, even as I continue to fret over Clem’s stamp collection. What about the other stuff I’ve picked up along the way? A few items continue to hold meaning. But mostly, I see great virtue in having less. Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles. [xyz-ihs snippet="Donate"]