Wise Bread (Philip Brewer)

Why Private Banking Isn't Just for Millionaires Anymore

Philip Brewer — Fri, 08 Mar 2019 22:43:46 +0000

In the past, if you had $1 million — or better, $10 million — there were private banks and bankers who would provide services you wouldn't get from an ordinary bank. But thanks to changes in the financial industry, ordinary, non-wealthy people can now access almost all of these services, if they're willing to do a bit of the legwork themselves.

The sorts of services that private banks provide fall into four general categories: Banking services, investment services, advisory services, and perqs. Of course, they also come at a price, which you can largely avoid if you roll your own.

Banking services

One thing that private banks provide are standard banking services. They receive your deposits, process your payments, transfer your money, offer loans, etc. Your ordinary non-private bank will do all of these things as well, but in the old days, they expected you to show up in-person at the bank. Since you can now do these things online, rolling your own private-bank equivalent is easy.

Let's say you're traveling abroad, meet someone lovely that you'd like to spend more time with, and decide to extend your travels. In the old days, a private banker could really help with logistics — get someone to collect your mail, sort through it to find any checks or bills you'd received, and get them deposited or paid as the case may be. If incoming checks didn't quite cover your new travel expenses, they could also float you a quick loan. They could also get local currency delivered to you.

But now, handling these sorts of affairs is much easier for people to do on their own. Your incoming funds are direct deposited to your account. Your bills are set to be paid automatically, or you can can pay them online. Local currency is as close as the nearest ATM.

Loans, in particular, used to be a major competitive advantage for private bankers. Because your private banker had intimate knowledge of the state of your finances, they were uniquely positioned to be able to immediately approve a loan — either a short-term loan, or a longer-term loan to buy a third home or restructure your business. Now every credit card will allow you to take a cash advance at least as large as a prudent banker would allow. (A very expensive loan, mind you, but one that'll be approved faster than even a private banker could.)

Investing services

Private banks have an investment arm. The fee they charge is a fraction of your assets under management, but the fee scales down as you have more to invest.

Of course, most banks have investment options nowadays, and every brokerage can provide banking services. They will also manage your money for a fraction of the assets under management. Or, for a much smaller fraction of the money under management, you can create your own investment portfolio. Put your money into low-cost mutual funds or buy some ETFs in your brokerage account and you'll likely do as well in the market as the rich guy whose private banker has hooked him up with a top investment adviser. (See also: How One Mediocre Investor Prospered After the Market Crash)

Advising services

Besides actual banking services, a private banker can connect you with all sorts of professionals that the wealthy need: tax accountants, estate planners, investment managers, and so on. If you're really wealthy, it can make sense to wrap all these advisers together with a private banker.

But if you're not that wealthy, you probably don't need your banker to pull everything together, as long as you're willing to do the leg work yourself. It's not that hard to find a good tax guy or accountant, and a lawyer who can write a will or a trust. (See also: 5 Estate Planning Questions Everyone Should Ask)

Perqs

This is where the movie version of the private banker meets real life. One category of perqs is called concierge services. Your private banker can hook you up with hard-to-get tickets, invitations to exclusive events, make complicated travel arrangements, and so on. This category is so popular these days that just about everybody is offering it — in particular, all the upscale credit cards have a concierge service. They've started outsourcing the work to firms that specialize in it — something that's an option for you as well.

It's probably cheaper to hire a personal assistant to do these things for you, and of course much cheaper to do it yourself.

Legitimate needs

If you're really rich — investable assets in excess of $25 million, let's say — there will be private bankers interested in your business, and they may be able to provide services that are worth the $125,000 or more they're likely to cost each year.

For example, restructuring a multi-million dollar business so that Dad can partially cash out while passing the rest of the business on to his kids is likely to require a whole range of experts in accounting, taxes, and estate planning, plus a banker. A private banker is probably your best entryway into getting services of that sort.

Or let's say you're buying a private jet. Even if you're genuinely rich enough to afford one, you probably don't have all that money sitting around in cash. Your private banker will be pleased to produce a custom financing package based on intimate knowledge of what cash you do have and what investment transactions are already in the works. They'll also handle the payment and make a conference room available for you and the seller to finalize the transaction.

Short of that sort of wealth and complexity, you can almost certainly get the services you need for much less than what a private banker would charge (if they'd even take your business). (See also: The 5 Millennial Money Apps Everyone Should Use)

My advice

Banking services — even the sorts that used to be specialized for rich people — are routinely available to ordinary people at very reasonable prices, thanks to innovation and the internet. Because banks now all own brokerage firms and brokerage firms now all own banks, you can go either way when you pick the firm where you'll roll your own private bank. The advantage of a brokerage firm is that you can use your investments as collateral for a loan — the interest rate is typically half to a third of what a cash advance on a credit card would cost you. The advantage of a bank is that they have local offices where you can get cash, talk to a banker, use their conference room to close a deal, etc.

You want to avoid money center banks and major regional banks — they're only interested in earning million-dollar fees for putting together billion-dollar deals. What you want is a bank one step down in size. (My bank isn't in the top 100 biggest banks, but it is in the top 200.) Banks that size, especially ones with a local connection, will have bankers who are actually interested in providing services to individual people, rather than just to major corporations. And a banker who will provide personal service can be just as good as a private banker.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Interest Rates Are Rising: Here's Where to Keep Your Cash

Philip Brewer — Wed, 11 Apr 2018 08:30:05 +0000

These past 10 years, interest rates have been so low it just about didn't matter what you did with your cash. There was a certain convenience to that — you didn't have to move money back and forth between checking and higher-rate accounts, because they paid almost the same. As a bonus, you didn't have to track money market returns to be sure the rate your account paid was still competitive, because they all paid just a fraction over 0 percent.

That has changed. The Fed has already started raising interest rates, and will probably raise rates another three-quarters of a percentage point this year. Already, rates are high enough that it makes a difference where you hold your cash, and that difference is starting to get significant. (See also: How to Benefit From Rising Interest Rates)

Let's take a look at where you should be holding your money, as well as a few reasons why you need cash on hand.

What cash to hold

There are four main reasons to hold cash: liquidity balances, planned expenses, temporary holdings, and an emergency fund. The size of your temporary holdings may vary quite a bit from time to time, but the others have pretty specific parameters that it's worth being clear about.

Liquidity balances

Your income arrives in chunks that don't precisely match the due dates of your bills. Liquidity balances are the cash you keep on hand to smooth that out, so that you can pay each bill when it's due. Sizing the cash demands of your liquidity balances is easy: It's the total of all the bills that might come due between income payments. Once you know this amount, you can set it aside for when you need it.

Planned expenses

Everybody has some expenses that are not regular monthly bills, but are nevertheless known in advance. Some of these are regular, they're just not monthly: tax payments, insurance premiums, tuition payments, etc. Others are irregular, such as discretionary payments on things like home improvements, airfare for your vacation, buying a boat, etc. Regular or irregular, if there's a near-term payment to make, it's good money management to hold some cash to pay it.

Temporary investments

Sometimes you have cash that you've decided to invest, but that you aren't ready to invest yet. Maybe you don't know exactly where the money should go until the next time you rebalance your portfolio. Maybe you expect market conditions to improve. Maybe you're accumulating money to meet the minimum balance of some fund. Whatever the reason, until you're ready to invest, you're holding the money as cash. (See also: How the Risk Averse Can Get Into the Stock Market)

Emergencies

Your emergency fund is cash set aside to handle a financial crisis — a job loss, a medical bill, a home repair, etc. Having the money on hand means that you won't have to turn to credit cards or other forms of debt to get through your emergency. Experts often recommend an emergency cushion of three to six months' worth of daily living expenses. Your unique situation — such as an expensive medical condition or a high-paying job that would be difficult to replace — may call for a larger fund. (See also: 5-Minute Finance: Start an Emergency Fund)

Where to hold your cash

In the U.S., we have a complex history of rules related to ceilings on the rates banks can pay, special exceptions to those rules, and free-market efforts to get around those rules. There are a lot of different kinds of institutions that hold cash and a lot of different kinds of accounts available at one or another of those institutions.

Whatever sort of institution you choose, you still need to figure out what sorts of accounts to use for your cash. Here are the usual suspects.

Checking accounts

For most people, a checking account is their main gateway into the banking system. Their paycheck is direct deposited into their checking account, and most of their bills are paid out of their checking account.

Back in the 1980s and 1990s, banks had to pay reasonably competitive interest rates to pull in money to support their (highly profitable) lending. That became less and less true in the early 21st century, until the financial crisis put an end to it. At the moment, checking accounts pay so little interest that you might as well just ignore it.

That doesn't mean you shouldn't have a checking account — it's just no longer where you should hold your liquidity balances or your cash to cover planned expenses, until just a day or two before you need to make a payment. (See also: 9 Common Mistakes You're Making With Your Checking Account)

Reloadable debit cards

These are a relatively new invention, created for people who don't need (or can't manage) an ordinary checking account. As the name suggests, it functions as a debit card. There is usually some limited ATM access and some sort of bill-paying feature.

Once little more than fee-generating boondoggle for the banks, rule changes made them pretty fair for consumers a few years ago. Since these new rules went into effect, a reloadable debit card had been a reasonable place to hold your cash balances when rates were low, but now that interest rates are going up they're only reasonable for people whose circumstances make a bank account impractical.

Savings accounts

It used to be that you opened a savings account even before you opened a checking account. Now an ordinary savings account is almost pointless. At least at my bank, a savings account pays the same minuscule rate as a checking account, so I might just as well leave my excess cash in my checking account.

When you think about savings accounts nowadays, though, you're usually not thinking about a savings account at your local bank. You're thinking about an internet savings account. (See also: 6 Important Things to Look for in a Savings Account)

Internet savings accounts

These are just ordinary savings accounts, except they're at a bank that's willing to pay up to get your money, and that offers a convenient web interface for moving money to and from your checking account. The money moves by ACH transfer, typically in two or three days. This is quick enough to make these accounts very useful as a place to hold your cash.

Unlike a lot of other kinds of financial accounts (where the terms and conditions vary in complex ways), the terms and conditions of internet savings accounts tend to be relatively standard, making it easy for savers to compare one account to another and pick the one that offers the best deal. (See also: 5 Best Online Savings Accounts)

Money market funds

Money funds are a legacy of 1970s interest rate regulations. They pool money from shareholders, invest it in short-term securities, and share the return. Because they just share whatever return they get, returns go up quickly when interest rates rise. (Unlike savings and money market accounts, where banks that already have your money won't raise rates until they have to.)

Although very safe, investments in a money market fund are not guaranteed. In fact, one money market fund lost enough money during the financial crisis that it was unable to make investors whole. That prompted major players in the money market to simultaneously all try to get out of assets with even the slightest risk. Basically, that was the financial crisis.

Money market accounts

Created in the early 1980s as a carefully carved-out exception to interest rate regulations, money market accounts were created in a way that didn't cannibalize on checking or savings accounts (basically, they only allowed six withdrawals per month and only three of those could be by check). They had advantages over a money market fund: They paid an announced rate (instead of just whatever the fund could earn in the market), they were guaranteed to pay off at 100 cents on the dollar, and they had FDIC insurance. That's all still true. (See also: Money Market Accounts: Ideal for Emergency Funds)

Other possibilities

There are a lot of other places you might hold cash for the short term: Demand note accounts (basically an IOU from a major financial corporation packaged up like an internet savings account), cash management accounts (a money fund or money market account wrapped up inside a brokerage account), CDs, and Treasury bills.

Bottom line

It no longer makes good sense to just keep your money in your checking account — the simplest version of cash management. Now that you can earn a return that's more than a fraction above zero, the time has come to manage your cash more actively.

Simple, but not too simple

The easiest version of active management is just to shift most of your liquidity balances, near-term planned expenses, and temporary investments into some sort of higher-yield account.

Just do this: When your paycheck (or any other money) arrives in your checking account, transfer most of it to your higher-yield account. Two or three days before your bills need to be paid, transfer the necessary amount of money back to your checking account.

Not so simple

If you're into this sort of thing, you can get as fancy as you want.

If your finances are sufficiently under control, you can skip the step of having your income enter via your checking account only to be transferred to your higher-yield account. Instead, you can arrange to have your direct deposit go straight into your high-yield account. That gets you earning your higher yield a couple of days earlier, and potentially cuts the number of transfers you need to make in half.

Especially for expenses with due dates that are well-known but further off than this month, it may make sense to do something with CDs or Treasury bills.

It may be more convenient to keep your temporary investments closer to where the investments are going to be held — perhaps in a money market fund in the same family as the other mutual funds you hold, or one with your brokerage firm.

The possibilities are endless. But the time for just leaving your money idle in your checking account has ended.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Where Are They Now? The Forgotten Dollar Bills (and Coins)

Philip Brewer — Wed, 03 Jan 2018 09:00:07 +0000

Anybody who buys or sells things in the U.S. knows the ordinary circulating notes and coins — even people who use their debit card most of the time. If you're at all interested in money, you probably also know that there are a bunch of notes and coins that nobody uses anymore. The whys and wherefores of this "forgotten" money makes for an interesting history. (See also: Clams, Cheese, and Bread: Why We Call Money What We Do)

Notes and coins you can use, but nobody does

There is one coin and one note that I would use all the time, if they didn't turn out to be so awkward to use at the checkout counter.

That would be the $1 coin, or Sacagawea Golden Dollar:

[Photo: United States Mint]

And the $2 bill:

[Photo: United States Bureau of Engraving and Printing]

Well, almost nobody. I actually used to use the $1 coin quite a bit, as a way to enable my soft drink habit. Because the current dollar coins have the same size, weight, and electromagnetic properties as the Susan B. Anthony dollar issued in 1979, any vending machine made in the last 40 years can accept the coin. I found it much more convenient to stick a couple of dollar coins in my pocket, instead of eight quarters.

If you're going to transact business with a person, though, trying to hand over a dollar coin is going to slow things down.

Probably even worse would be trying to use a $2 bill. They're ordinary circulating bank notes — legal tender, currently issued Federal Reserve notes. You can buy as many as you want at your local bank (although it might take a short wait while the teller visits the vault). But once again, if you use them in a checkout line, you're likely going to catch the cashier off guard. They're that rare.

Notes and coins you could use, but shouldn't

There are also some notes and coins that are rare enough to be valuable. Using them as legal tender would be a waste of money.

Large-denomination notes

There used to be $500 and $1,000 bills circulating as regular currency. They were useful for large transactions (buying a business, buying real estate, etc.) in times and places where it might take days to clear a check (or even know if it was good).

By the 1960s, those times and places had gotten pretty scarce, and there was a general sense that the main reason someone might use these sorts of high-denomination bank notes was to engage in illicit transactions — drug deals, bribes, political payoffs, and so on. In 1969, President Nixon ordered the $500 and $1,000 bills withdrawn from circulation in order to make corrupt payments harder.

However, it remains a point of pride for the U.S. Treasury that legal tender U.S. currency remain legal tender: The public can rely on money that has ever entered circulation at its face value. So you can still use a $500 or $1,000 bill if you have one. People actually do use them, mostly as a way to show off — think of putting a stack of $500 bills down at a high-stakes poker game.

You could even deposit them at the bank and get face value. But it would be a dumb idea, because they're worth more than face value as a collectible. The particular price you'd get depends on the rarity and condition of the bill, but certain rare $500 bills reportedly sell to collectors for as high as $10,000.

There used to be $5,000 and $10,000 notes, as well. There was even a $100,000 gold certificate, but it never circulated: It was issued by the U.S. Treasury to Federal Reserve Banks against gold deposited with the Treasury, and used to balance the books among the different Federal Reserve Banks.

U.S. Mint bullion coins

The U.S. Mint issues a whole series of silver, gold, and platinum coins which are legal tender.

The American Eagle one-ounce gold coin is legal tender for $50, but since the coin would cost you $1,500 or so, you wouldn't want to spend it. The gold coins come in a bunch of fractional-ounce sizes as well. There's also a one-ounce silver coin: legal tender for $1, street value about $20.

[Photo: United States Mint]

These are legal tender for a specific reason that has nothing to do with the idea that anyone might actually spend them: The purchase and sale of legal tender instruments isn't subject to sales tax. (Which is a good thing. Imagine having to pay sales tax if you changed a $20 into $5 or $1 bills at the bank!) Because of the technicality that the U.S. Mint's bullion coins have a face value, you can buy and sell them without paying the sales tax.

Notes and coins that were short-lived

There have been a few oddball notes and coins that were very short-lived. Today, these are worth far more than face value when sold as collector's items.

Hawaii overprint dollar

During World War II, there was considerable concern that Japan might invade Hawaii, and part of the concern was that doing so would give them access to the currency on the island in the hands of banks, business, and ordinary people. With those dollars, Japan would be able to buy weapons, fuel, and other war material.

The U.S. responded by withdrawing all the currency from circulation, and replacing it with currency that had the word Hawaii overprinted on both sides.

[Photo: National Numismatic Collection, National Museum of American History]

The idea was that, if there was an invasion, the U.S. could demonetize the overprinted dollars, making them worthless to the invaders, but that on the islands they could circulate normally until or unless there was an invasion.

After the war the overprint currency was replaced with ordinary notes.

Trade dollars

In the 1870s, trade between China and the West largely depended on Spanish silver dollars. This annoyed traders from many other countries, who disliked having to buy the foreign coins to pay the Chinese.

Because this happened just as a gold standard (rather than a bimetallic system based on both gold and silver) was emerging, the legal-tender status of these silver coins was in flux. Initially they were legal tender only up to $5. When the price of silver fell, making their face value more than the silver content, and the coins started flowing back into the country, Congress responded by officially demonetizing the trade dollar in 1876.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How the Risk Averse Can Get Into the Stock Market

Philip Brewer — Mon, 06 Nov 2017 08:30:15 +0000

The stock market can be risky. Just 10 years ago, due to the financial panic and subsequent Great Recession, stocks lost half their value in the course of not much more than a year. But the stock market is also a great investment: Long term gains are large, and even the biggest losses are routinely reversed in a matter of a few years.

The upshot is that you should almost certainly have at least some money in the market.

But since it's always either rising or falling, and since nobody wants to be foolish, it's often hard to get into, or back into, the market. And yet, because of the large gains the market routinely offers over the long term, it's absolutely worth doing — even for those terrified of risk. (See also: How to Get Over These 5 Scary Things About Investing)

Figuring out how much to invest

The best way to think about your portfolio when you're risk-averse is by recognizing that a significant amount of your money is not part of it and should not be invested at all. If you cover your other important financial bases first, you may feel better about investing.

First, make sure you have adequate liquidity balances — that's cash on hand to deal with the fact that your income arrives on one schedule (biweekly paychecks, perhaps) while your bills arrive on a different schedule (some monthly, others perhaps annually or semi-annually).

Second, make sure you have an adequate emergency fund to deal with events like an unexpected loss of income, or expenses that come out of the blue. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Third, make sure you have a plan to fund medium-term expenses (a savings account or CD or maybe an intermediate-term bond fund). These are things you know you're going to buy in the next few years.

Once you've got those bases covered, the rest of your money is your investment portfolio.

By identifying how much of your money is not part of your investment portfolio, you may find yourself much more comfortable thinking about committing some fraction of the rest of your money to the stock market.

However, maybe you've done that and you're still not comfortable. That brings us back to where we started. In particular, it raises the question: If you know the market is the right place for a sizable chunk of your portfolio for the long term, why are you hesitating to commit funds now?

Ask yourself why you're afraid

There are probably two big reasons why people hesitate to get into the stock market: Either because the market seems "too risky," or because they're "waiting for the right time."

The way to get yourself to make the move into the stock market depends on which reason is blocking you right now.

Too risky

If it's just that the market seems too risky, you can often get started investing by going small. If you can't bring yourself to put 70 percent of your portfolio into stocks (which is actually a reasonable allocation if you're fairly young), can you bring yourself to put 5 or 10 percent in?

When I was first starting to invest, most mutual funds had minimum investments that were pretty large (compared to the size of my portfolio), but there are now ways to invest amounts as small as just a few hundred dollars into stocks.

If the market seems very risky, pick a very small amount of money — small enough that you could absorb even a 50 percent loss without endangering your long-term goals — and take the plunge. Put that small amount into the market. Better yet, set up some sort of automatic investment (a payroll deduction into a 401(k) or an automatic transfer to a mutual fund or brokerage account) that would send a small amount away every month or every paycheck.

If you can find an amount small enough that you're willing to risk it — and especially if you can set up some sort of automated further investments — you set yourself up to get past your risk aversion the easy way: By seeing gains start piling up right away. And if they don't — if your investments start off by losing money — you'll still be OK, for two reasons. First, you'll know that your losses are so small that they scarcely matter over the long term. Second, you'll know that your future investments are buying stocks at a lower price (and buying low is an essential part of "buy low/sell high"). (See also: How to Invest If You're Worried About a Stock Market Crash)

Waiting for the right time

If the issue is that you accept that the market is the right place to be for the long term, but right now is the wrong time to get in (perhaps because the market seems kind of high, perhaps because it has recently dropped and you worry it might drop further, perhaps because you see major risks to the economy from business conditions or the international situation or Congress), I have two thoughts.

First, understand that it hardly matters. I saw a study some years back that compared two hypothetical brothers. Each had invested $2,000 a year in stocks in his IRA, but each year one brother had the good luck to make his investment on the day the stock market hit its low for that year. The other brother had the bad luck to make his investment on the day that the market hit its high for the year.

The result? After 10 years, it barely mattered. The lucky brother had a tiny bit more money, but both of them had a lot more money than the guy who kept his money in cash waiting for a "better time" to invest that never came.

Second, approach it just as I advised the person who thought the market was too risky: Start small.

Maybe now isn't the right time to jump in with 70 percent of your portfolio, but surely having 0 percent of your portfolio in the market is the wrong choice.

Go ahead and put a little money in. It doesn't have to be a lot. (And, once again, even better if you set up some sort of automated investment so you're continuing to put money into the market regularly over time.)

Finding the right balance

Suppose you do start small, but through a combination of further investments and growth in the market, find yourself a few years down the road with a sizable portfolio and with a large portion of it invested in stocks. When do you have too much in stocks?

One answer is that you have too much if it's worrying you. If you're having trouble sleeping at night, or if hearing the market report on the news ruins your appetite, then by all means sell some stocks and put the money into a CD or something. If you're still anxious a month later, sell some more. (See also: Find the Investing Style That's Right for You)

I would advise that you not use this as an excuse to time the market. The market will always be going up or down and neither circumstance is a good reason to change your mind about having stocks in your portfolio.

Instead, you should probably have a target asset allocation. Figure out what you want in stocks (and bonds, real estate, gold, cash, etc.) and buy and sell as necessary to return to that target allocation from time to time — usually annually is good. This is a process called rebalancing your portfolio. (See also: The Basics of Asset Allocation)

An old rule of thumb is to set your stock allocation percentage at 100 minus your age, and invest the rest in bonds. So someone in their 20s would put 70 to 80 percent into stocks while someone in their 60s would put 30 to 40 percent into stocks. That's a perfectly good rule, although with people living so much longer now than even a generation ago, it should probably be a bit more aggressive for people in the years just before and just after retirement. (See also: 7 Reasons to Invest in Stocks Past Age 50)

Your asset allocation is important, but don't let that paralyze you. The worst thing you can do is agonize over your asset allocation to the point that you never get around to investing.

Put a little money in stocks right away. Set up some sort of automatic investment. Once you have a tidy sum invested in stocks, start putting some of the new money in bonds. Only after those investments start getting large do you need to think about whether it's time to add some more exotic choices.

Start small. Start simple. But above everything else: Start.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Make Sure You Don't Run Out of Money in Retirement

Philip Brewer — Fri, 26 May 2017 08:30:09 +0000

An annuity is a stream of fixed payments that's guaranteed, often for as long as you live. Having an annuity can make retirement more secure, but it's hard to recommend them as investment vehicles, because almost every annuity on the market is a terrible investment. They tend to be sold by salesmen, so they're often loaded with fees. And, because being upfront about the fees would make them hard to sell, these fees are obscure (often outright hidden) and are typically different for every product, making it especially hard to comparison shop. (See also: Should You Get an Annuity?)

But my experience these past few years — helping older relatives with their finances, and starting to take the little pension I earned as a software engineer — has given me a new perspective on annuities. Having an annuity is more than just nice: It's wonderful! It's just buying them that's usually terrible.

Fortunately, there are a few that are worth buying. You don't hear about them often, because they don't siphon off a big chunk of your investment to pay a salesman, so salesmen don't push them.

Why annuities are great

It used to be that anyone with a good job retired with an annuity in the form of a pension. This is how I've gotten my recent experience with just how great it is to have an annuity: All my older relatives are now receiving pensions.

You never outlive your income

The main thing that's great about an annuity is that having one means you're never going to be broke. Even if you overspend and run down your savings, even if the stock market crashes or you make terrible investment decisions and your investment portfolio takes huge losses, you'll still get that monthly check for as long as you live.

You don't need to have an annuity to arrange that — you can live off capital in a way that makes it last the rest of your life — but an annuity makes it much easier.

They can raise your income

The other thing that's great about an annuity is that it can, at least potentially, be more money to live on. See, the only safe way to live off capital is to just spend the income from your investments. But that's not much money (especially these days).

If you knew how long you were going to live, you could spend down your capital so that you'd die with just enough money to pay off your last month's bills. But since you don't know how long you're going to live, you have to make a conservative estimate, holding back enough capital so that you won't go broke even if you live to 100. (Of course even that might not be enough. What if you live to 114?)

The company that provides your annuity has a much easier job. They don't need to know whether you'll live to 97 or kick the bucket at 67. They count on the fact that the average person will live an average life span. They can arrange the terms of the annuities so that the payouts don't exhaust the total pool until the last person dies. The fact that some people die the month after their pension starts means that there's enough money to pay for the people who go on to live for decades.

Offset against that is the fact that the company that's providing your annuity needs to make a profit, and it also needs to hold back a reserve against the possibility that it'll get unlucky and a bunch of their customers will live longer than average — but both of those factors are relatively small.

Annuitize, but how much?

If you accept the idea that you probably ought to have an annuity of some size, the next question is: How big should the annuity be?

At one extreme, you could just annuitize all your money — take all your savings and investments (except your checking account and your emergency fund) and buy an annuity. Then you'd know what your income would be for the rest of your life and you could budget for it.

I recommend against that. There are many reasons why it's worth having some capital. Your capital earns an investment return and it also provides a measure of safety as a backup to your emergency fund. It makes it possible to fund expenses beyond your bare-bones budget. Perhaps most important, having some capital saves you money in all kinds of different ways — because you have funds on hand, you can take advantage of deals, you can avoid high-interest borrowing, and you have money to put down a large security deposit in cases where that will save you money.

At the other extreme, you could annuitize none of your money and just live off your capital. I've just explained the downsides to that.

You want to be somewhere in the middle. With a modest annuity, you're protected from running your income down to zero, and yet you can preserve some amount of capital.

My advice is this: You should annuitize enough to cover your rock-bottom expenses, the lowest amount you could live on indefinitely. That way, you're putting yourself in a position where you can be sure you can get by no matter what happens to your investments, while preserving enough of an investment portfolio to fund your other life goals — travel, making a major purchase, leaving an estate to your heirs, etc.

Before you start shopping for annuities, be sure to take into account any annuities you already have. But unless you're old, and even then only if you had a pretty good job at a pretty big company for many years, you probably aren't going to have a great pension. (If you're only kind of old, and worked at a pretty big company for a few years before they all phased out their traditional pensions in the early 2000s, maybe there's a small pension waiting for you. If so, that's great. Even if it's not enough to live on, it's a very positive contribution to your retirement income.)

However, most people reading this probably won't get a good pension.

Fortunately, there is an annuity you very likely do have.

The annuity you already have

You almost certainly already have an annuity in the form of a national pension scheme, such as Social Security. The amount of Social Security you will get depends on your own employment history. For most people, it will provide a large fraction of the "rock-bottom expenses" I recommend you cover with an annuity, but you can generally expect there to be some gap.

If you have an employer-sponsored pension, even a small one, it may well cover the gap. If you don't, I recommend that you cover it with an annuity that you buy.

How to buy an annuity

As I said at the beginning, most of the annuities you can buy are terrible investments, but there are good ones. It is possible to buy an individual annuity and get an OK deal. It's just hard because the companies that sell them make it virtually impossible to compare one annuity to another.

This is especially true for the sorts of annuities that are most like a pension: The ones set up so you make a payment every month starting in your 30s or 40s, then get a check every month starting when you're 65.

Those are called deferred annuities (because you defer getting your money until age 65), and they're always terrible. They always have what are called "back-end" fees — money that the salesman gets to keep when you figure out that you've made a terrible deal and want to get (some of) your money back. The rules on back-end fees are always different.

To make it even harder, these sorts of annuities are usually bundled with some sort of life insurance (supposedly so that if you die before you retire your estate won't "lose" all the money paid into the annuity) — and of course the details of those insurance policies are always different as well.

Comparison shopping

It is possible to buy an annuity in a way that does allow you to compare them. Don't buy one with monthly payments. Instead, save and invest the money in the stock market yourself during your working years. Then, when you're ready to retire, buy what's called a "single premium immediate annuity" — you put up a big chunk of money today, and then start receiving monthly payments immediately that last for the rest of your life. (The monthly payments, of course, should equal the gap you identified between your Social Security and your rock-bottom budget.)

That is something that's easy to compare: How much do you have to pay today for a stream of income that starts next month and lasts the rest of your life? You can get a few quotes and pick the best deal.

These sorts of annuities usually don't have the life insurance policy that supposedly protects against your dying before you start taking payments, because the payments start immediately. That's good. Bundling in life insurance just makes it harder to compare prices. If you need life insurance, buy a life insurance policy separately.

Be very careful of letting them include any sort of survivor benefit, because that can also make the annuities harder to compare (although as long as the rules are exactly the same, it is at least possible). One alternative, if you need a survivor benefit, is to buy a life insurance policy that will pay off enough for your spouse to buy his or her own annuity.

As an aside, let me mention that the annuity salesmen among you are going to jump in and point out that you're giving up an important tax advantage if you only consider an immediate annuity. This is technically true, but in fact is pretty unimportant. Let me just say this: If you are maxing out your 401(k), and your IRA, and your Roth IRA, there is an opportunity to tax shelter a bit more money through an annuity contract. In practice, I'm willing to bet that the tax advantage will never equal the fees you're going to end up paying.

If you do save your money in a 401(k) or IRA, there are tax rules for using that money to buy your annuity. Follow the rules and you won't owe any taxes when the money is used to buy the annuity. You will, however, pay taxes on the annuity payments when you receive them (just like you would if you'd taken distributions from the tax-deferred plan directly).

Where to buy

Pretty much any life insurance company will sell you an annuity, but I only know of two places to get a good one: Vanguard and TIAA-CREF. (There used to be a third, but Berkshire Hathaway got out of the business a few years ago.)

The main problem with buying directly from an insurance company is just that their annuity sales operations are organized around their annuity salesmen, who will immediately start trying to sell you something that's more profitable (to them) than a single premium immediate annuity — that's the step you avoid by going through Vanguard or TIAA-CREF. (They also have enough buying power to get especially good rates, because they bring in large numbers of customers.)

If you're sure you can bear up under the sales pressure, there's no reason not to get quotes directly from the insurance companies. (Just because I don't know of any other good places to buy one doesn't mean there aren't any.) Insurance companies that sell annuities will be very easy to find — just do an internet search for information about annuities and you'll get a dozen ads for them and for online tools to compare their offerings.

You're handing over a large fraction of your wealth and counting on the insurance company to be around for the rest of your life, so you want to have considerable confidence in the financial soundness of the company you pick. I would not consider any company rated less than A by the insurance grading firm A.M. Best, and I'd be happier with one rated A+.

Buy when rates are high

To buy an annuity, you have to put up a pretty sizable chunk of cash. (Vanguard quotes the cost today to a 65-year-old male buying a single premium immediate annuity of $1,000 a month for the rest of his life as being $180,052.)

Unless you're rich, the cost of an annuity that covers your rock-bottom expenses is going to be a large fraction of your entire retirement savings — which is OK, because it's going to be a large chunk of your entire retirement income.

The insurance company that sells you your annuity is going to invest that sizable chunk of cash in a portfolio of stocks and (mostly) bonds, and then use the dividends from those stocks and (mostly) the interest payments from those bonds to pay your annuity. Because of this, an annuity is much cheaper when interest rates are high.

If you bought an annuity right before the financial crisis, you made out very well. If you wanted to buy one in the past eight or nine years, you probably found that they were incredibly expensive. But in the current era of rising interest rates, annuities are becoming more affordable again.

Still, if you're approaching retirement age, understand that there is no rush. Figure out your rock-bottom expenses — and then live with that budget as an experiment. Maybe you'll find that you'll need more than that in retirement. Maybe you'll actually need less. Do some comparison shopping. Take your time. Then, when you've got a pretty good handle on the expense of your retirement lifestyle, at a time when interest rates are up a bit and you're ready to quit working, go ahead and buy that annuity.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How One Mediocre Investor Prospered After the Market Crash

Philip Brewer — Tue, 02 May 2017 08:30:11 +0000

The mediocre financial advice I've offered in my last few posts boils down to this: Use low-cost funds, establish an appropriate asset allocation, and rebalance it annually.

It's not new advice. My own portfolio was strongly influenced by it back in the early 1980s. By the 1990s, it was pretty much the standard advice you would get anywhere. Many studies at the time showed that a very simple portfolio — just an S&P 500 index fund, plus a long-term bond fund — tended to outperform managed funds, especially after the costs of the managed funds were taken into account.

I haven't seen as many studies in the years since the financial crisis, so I thought I'd take a quick look at how this sort of basic asset allocation held up in the aftermath.

Most people date the financial crisis from 2008, but I tend to date it from June of 2007, because that's when I found out that I'd be losing my job. For that reason, the graphs below run from then through the latest data available as of March 29, 2017.

As it turns out, a mediocre portfolio held up pretty well.

Criteria for success

To decide whether a particular style of investing is a success, it helps to know what your goals are. Most people would include "maximum return" as at least part of their goal, but instead, I suggest that your portfolio provide an investment return that supports your specific life needs.

A portfolio that comfortably beats inflation is part of that. It's also a plus if the portfolio doesn't swing wildly in value — in case your circumstances require you to cash out a significant amount on an emergency basis. It's nice, too, if the portfolio provides a mix of income and growth, so that if changes in what's in fashion among investors push one category of stocks up or down, the overall value of your portfolio doesn't take too big of a hit. (Personally I've always had a sneaking preference for income, even though tax policy has often favored growth.)

With those criteria in mind, let's look at how some of the pieces of a mediocre portfolio have done.

Pieces of a mediocre portfolio

The most basic mediocre portfolio is just an S&P 500 index fund and a long-term bond fund, with the ratio between those two gradually shifting from mostly stocks (for a young person) toward mostly bonds (for someone who has already retired).

Stock market investments

The value of an S&P 500 index fund dropped dramatically during the crisis itself, but it hit bottom well before the end of the recession, recovered all of its losses by 2013, and is now about 50 percent above where it started — meaning that on stock price alone, you've got an annual return of well over 4 percent. With dividends reinvested, your annual return comes to nearly 7 percent (take a look at the 10-year average annual return of your favorite S&P 500 index fund).

(Source: St. Louis Federal Reserve)

Bond market investments

There isn't an exact bond-market equivalent for the S&P 500 index fund, so it's a little hard to say how your investments would have done during the crisis and since. (I poked around at a few major mutual fund companies and found average annual total returns on various long-term bond funds for the past 10 years ranging from 3.6 percent to 6.1 percent, depending on the fund.)

The return on a bond fund depends on interest rates. If you buy a bond that pays X percent and rates go up, your old bond is worth less (because otherwise people will just buy the new bond that pays more). Conversely, if rates go down, your old bond is worth more.

With that in mind, here's a graph of the interest rate paid on a U.S. government 10-year treasury bond:

(Source: St. Louis Federal Reserve.)

Long-term interest rates dropped steadily before and during the recession. They rebounded modestly as the recession wound down, but then plummeted as it became clear that the economy needed, and would continue to need, extraordinary support from the Federal Reserve. Even now, long-term rates are about half what they were before the crisis began.

The upshot is that the value of bonds purchased before the crisis would have soared during the crisis. Bonds purchased during the crisis would also have gone up. Bonds purchased in the aftermath might be up or might be down, depending on exactly when they were bought.

Rebalancing

If you'd just had a portfolio of stocks or bonds, you'd have done ok. Your stocks would have gone down a lot, but they'd have eventually recovered. Your bonds would have gone up a lot, and would have since eased off. But the mediocre asset allocation is more than that. The essence of a mediocre asset allocation is annual rebalancing.

At the end of 2007, and again at the end of 2008, you would have sold some of your bonds — which would have jumped a great deal as interest rates fell ahead of and during the recession — and shifted that money into depressed stocks to restore your asset allocation.

New stocks purchased on the last day of 2008 would have been bought with the S&P 500 at 891 (down from close to 1,500 when you started). At the recent price of 2,359, those shares are up 165 percent. At the same time, you would have harvested much of the gains in your bond portfolio.

Really, the rebalancing is where the magic is.

Success

As I mentioned at the beginning, the criteria I'm using as indicators of success are return, stability, and providing a mix of income and growth.

The mediocre portfolio did a fine job of providing a return — especially if you rebalanced annually, thereby automatically buying stocks when they were at their lows.

Stability is always a problematic goal, because it's almost the opposite of growth — the most stable portfolio would be one invested 100 percent in cash, which would show no growth at all. The point here, just as it is with return, is not maximum stability, but rather a degree of stability that supports your life goals. Here again, the mediocre portfolio did fine, especially for older people with a larger bond portfolio, which is where it is most important.

Finally, the mediocre portfolio did a fine job at balancing income with growth. An S&P 500 index fund has produced a pretty good yield, especially compared to cash and bonds during this period of historic lows in interest rates. Annual rebalancing will have automatically shifted money out of bonds as interest rates fell (reducing the fraction of the portfolio invested where income is low) and future rebalancing will be shifting money back into bonds as interest rates rise.

I would hesitate to call its performance better than mediocre, but that's really the point: A mediocre investment portfolio, providing mediocre performance, is all it takes to support your life goals.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Spot Lousy Investment Advisers

Philip Brewer — Mon, 06 Mar 2017 10:30:37 +0000

You can easily hire people who claim to be good investment advisers. They hardly ever are. But there are several different kinds of downright lousy investment advisers, and it's worth learning how to identify them. (See also: Mediocre Advice Is Best for Investing)

I group them into three categories: The delusional, the liar, and the secretly mediocre.

The Delusional

The most common sign of the delusional financial adviser is that they can tell you about all the winning trades they've made, but they don't know the average annual return of their portfolio as a whole.

You'll find this same trait in a lot of ordinary investors, as well — they're full of stories of their investing successes. They may also have a few self-deprecating stories of investments that went wrong. But they simply don't know what their all-in return actually is.

For the ordinary investor, this is no big deal. But for someone selling their investment expertise, not knowing whether their advice beats what you can get following mediocre advice should disqualify them completely.

There is one important subcategory of lousy investment adviser that might not show this sign. I call them the "lucky so far." They're usually young with a pretty new track record. Typically, they're people who have a strong sense that one sector of the market — financial stocks, say, or precious metals — is the right choice for long-term investing. If they happen to get into the investment advising game right when their sector gets hot, they can produce outstanding investment returns, sometimes for a long time. Eventually the market turns against them and they lose a whole lot of their clients' money.

Of course there are a few legitimately superior investment advisers out there. It's really impossible to tell one of them from one of the "lucky so far," except that once they establish a record of shifting from this year's hot sector into next year's hot sector for several years in a row, somebody rich will notice and pay up to get their advice. One pretty good indication is that you won't be able to afford them.

The Liar

Just like the delusional financial adviser, there are many kinds of lying financial advisers. (Note that I'm not talking about scammers or fraudsters, just ordinary financial advisers who know their advice doesn't produce superior results, but hold themselves out as superior anyway.)

Probably the most common are the ones who used to be delusional, but eventually figured out that they weren't actually superior. Of course the honest thing to do then would be to find another career, but delusional financial advisers can make a lot of money, and that's hard to give up.

It's pretty easy to slip gradually into lying about your performance — just talk about your successes, and don't mention your failures.

The clearest sign of the liar is that they claim an "average annual return," but can't point to the specific trades that they or their clients made that produced this return. Instead, they'll point to lists of suggested trades — but if you have access to all the suggestions, it'll turn out that some of the bad ones don't make the list.

Another strong clue is vague advice, such as that you buy a stock "on dips," without specific numbers attached. This will make it easy for them to leave out losing trades (on the grounds that the dips were never low enough for them to enter the trade). They will also suggest that you use peaks in the market to "begin to lighten up" your position. If the stock continues to outperform, you'll find that they still list it in their model portfolio. Once it starts to lag, you'll see that they exited their position at the last high point.

Another common habit among the liars is to ignore trading costs — and the cost of their advice — when figuring the bottom line.

The Secretly Mediocre

When "index investing" first started getting big, financial magazines (and others who rated financial advisers) started comparing investment advisers' returns to the market averages. Lousy advisers often fell short, which was pretty embarrassing. A fair number reacted by shifting their advice to just the sort of mediocre advice I'm suggesting that you follow. That way, they'd at least match the market returns.

These investment advisers are giving you perfectly good advice, they're just charging you money to achieve performance you could get for free on your own.

You can spot the secretly mediocre advisers either by looking at their returns or by looking at their portfolio. In either case, it will end up looking a lot like the return or portfolio you could get from just following the indexes.

My Mediocre Advice

Genuinely superior advice from (extremely rare) genuinely superior investment advisers is generally so expensive it makes no sense to pay for it, unless you have a portfolio of millions of dollars.

Since Wise Bread is all about living large on a small budget, I figure it's pretty likely that you don't have the multimillion-dollar portfolio that would let superior financial advice pay for itself. In that case, I suggest that you just follow the mediocre advice I wrote about last time. Doing that, you'll get mediocre returns — which it turns out, are good enough.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 3 Rules Every Mediocre Investor Must Know

Philip Brewer — Mon, 27 Feb 2017 10:30:46 +0000

Mediocre financial advice can earn you mediocre investment returns — and mediocre investment returns are all you need to save for a house, send your kids to college, and fund your (potentially early) retirement. Mediocre investment advice is pretty straightforward. In fact, the only thing that's complicated about getting mediocre financial results is the stuff that comes before investing: Things like earning money, keeping your debt in check, finding a career, living frugally, and most crucially, building an adequate emergency fund.

Once you've got those things taken care of, you're ready to start investing. If you're at that point, here's my mediocre investment advice: Create a diversified portfolio of low-cost investments and rebalance it annually.

Diversified Portfolio

It's important to have diversity at several levels. Eventually you'll want diversity in investment types — not just stocks, but also bonds, real estate, precious metals, foreign currency, cash, etc. More importantly, you want finer-grained diversity especially in the earlier stages of building your portfolio. Don't let your portfolio get concentrated in just one or a few companies. (For what it's worth, don't let it get concentrated in the stock of your employer, either. That sets you up for a catastrophe, because if your employer runs into trouble, the value of your portfolio can crash at the same time your job is at risk.)

In the medium term — after you've got a well-diversified stock selection, but before it's time to branch out into more exotic investments — you'll want to expand the diversity of types of companies. Not just big companies, but also medium-sized and small companies. Not just U.S. companies, but also foreign companies. Not just tech companies, but also industrial companies and financial companies, and so on.

Diversity wins two ways. First, it's safer: As long as all your money isn't in just one thing, it doesn't matter so much whether it's a good year or a bad year for that thing. Second, it produces higher returns: No one can know which investment will be best, but a diversified portfolio probably has at least some money invested in some investments that will do especially well. (Of course retrospectively, there will have been one investment that does best, and risking having all your money in that would have produced the highest possible return — but that's exactly what a mediocre investor knows better than to attempt.)

Of course, you don't want a random selection of investments, even if such a thing might be quite diverse. You want a reasonably balanced portfolio — something I'll talk about at the end of this post.

Low-Cost Investments

The less money you pay in fees and commissions, the more money you have invested in earning a return.

Getting this right is so much easier now than it was when I started investing! In those days, you could scarcely avoid losing several percent of your money right off the top to commissions, and then lose another percent or two annually to fees. Now it's easy to make a stock trade for less than $10 in commissions, and it's easy to find mutual funds and exchange-traded funds that charge fees of only a fraction of 1%.

Still, it's easy to screw this up. Any investment that's advertised is paying its advertising budget somehow — probably with fees from investors. Any investment that's sold by agents or brokers is paying those agents or brokers somehow — probably with commissions or fees from investors.

All those costs come straight out of your return. Keep them to a minimum.

Rebalance Annually

Your diversified portfolio will immediately start getting less diversified: Your winning investments will become a larger fraction of your portfolio while your losers will become a smaller fraction. In the short term, that's great. Who doesn't want a portfolio loaded with winners? Pretty soon though, you start losing the advantages of diversification. Last year's winners will inevitably become losers eventually, and you don't want that to happen after they've become a huge share of your portfolio.

The solution is to restore the original diversity. Sell some of the winners, and use the resulting cash to buy some more of the losers. It's the easiest possible way to buy low and sell high. (Maybe you don't want to buy exactly the losers — not if their poor performance leads you think there's something really wrong with them. But buy something kind of like them. Health care companies probably belong in your portfolio, even if many of them did badly this year.)

There are costs to rebalancing — costs in time and effort (figuring out what to sell and what to buy), and actual costs in commissions and fees. Because of that, you probably wouldn't want to rebalance constantly. You could make a case for monthly or quarterly rebalancing, but even that seems like a lot of effort for a small portfolio. Annually seems to hit the sweet spot.

What Goes Into a Diversified Portfolio?

What I'm going to suggest is that you start with a balanced portfolio of stocks and bonds.

It's not that there aren't plenty of other worthy investment options — cash, gold, silver, real estate, foreign currencies, etc. — it's just that they all have complications of one sort or another, and you can get started on earning your mediocre returns without them.

My mediocre investment advice then is that your portfolio should be a balance of stocks (for maximum growth) and bonds (for income and stability).

Finding the Right Balance Comes Down to Age — Yours

What's the right balance? An old rule of thumb was that 100 minus your age would be a good target percentage for the stock portion of your portfolio. At the start of your career, you'd have nearly 80% of your investments in stocks, and that fraction would gradually decline to about 35% as you approached retirement. The theory was that a young person can afford to take big risks, because he or she has time to wait for an eventual market rebound (and because during the early phase of building up a portfolio, even a large percentage loss is a small dollar amount). This makes a certain amount of sense. In fact, you could argue that a stock market that collapsed and then stayed down just when you started investing would be great — it would give you decades to buy stocks cheap.

That rule of thumb isn't bad, although with people living longer these days, it probably makes sense to keep a higher portion of stocks in your portfolio during the last years before and first years after retirement. Once you hit 50, maybe only cut your stock portfolio by 1% every two years.

When you're just getting started, feel free to keep it very simple. Perhaps just start putting money into a broad-based stock fund (such as an S&P 500 index fund). You can add a bond fund right away if you want, or wait until your annual rebalancing.

There are mutual funds that will manage this balance for you, holding stocks and bonds with a balance that shifts over time to some target date, at which point they'll hold a portfolio suitable for someone who has retired. You don't need them. In particular, they tend to have higher expenses, violating the "low cost" principle. You can do it easily enough for yourself. (Of course if you find that you don't do your annual rebalancing, then maybe paying a fund to do it for you is worth the expense.)

As an alternative to mutual funds, you can use exchange traded funds or ETFs. It doesn't matter.

Once your portfolio of stocks is large, you probably want to move beyond a single fund. Look at the other low-cost funds offered by the same fund family that provides your S&P 500 index fund. Consider adding a fund that includes foreign stocks (especially if the dollar seems strong at the time you'll be buying). Consider adding a fund that includes dividend-paying stocks (especially if interest rates are low relative to dividends).

Follow these mediocre tips, and you'll be racking up mediocre returns in no time! And remember — mediocre returns are all you need to live well and retire well.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Surprising Truth of Investing: Mediocre Advice Is Best

Philip Brewer — Mon, 20 Feb 2017 10:30:26 +0000

My investing success made it possible for me to quit working a regular job 10 years ago, at age 48. Even so, I have written very little about investing compared to what I've written about other personal finance topics. There's a reason for that: I'm a mediocre investor.

Over the course of my career as a software engineer, I saved and invested, earning a mediocre investment return. Since becoming a full-time writer, I've continued to earn investment returns — which although still mediocre, have been enough to supplement my income from writing.

As a mediocre investor, I have hesitated to hold myself out as an investment adviser, even if my results have met my own needs in a very satisfactory way. I figured people would quite legitimately compare me to superior investment advisers, and it was a comparison that I didn't think would put me in the best light. And yet, I'm going to overcome my hesitation, because looking for superior investment advisers is probably a mistake.

There are two big reasons why mediocre investment advice is the better choice: It's adequate, and it's cheap.

Mediocre Investing Advice Is Adequate

The purpose of your investment portfolio is to support your goals in life, and a mediocre return will do the trick. A mediocre return — just a few percentage points over inflation — will turn a modest flow of savings into a portfolio large enough to let you buy a house, send your kids to college, and fund a retirement (even an early retirement).

Trying to get a better-than-mediocre return requires taking financial risks that put all your life goals at risk.

If you have plenty of money available for investing, you can do both. You can cover your basic life goals with a portfolio invested for mediocre returns, and then you can direct your surplus investible funds into a portfolio that shoots for superior returns.

It can be fun if you enjoy that sort of thing. I did some of that. Looking back, I'd probably have been better off just going for mediocre returns on the whole thing.

Mediocre Investing Advice Is Cheap

Superior investing advice tends to be expensive. It's expensive because it's worth it — but it's really only worth that much to the truly wealthy.

Think about it. Let's say really good advice can boost your average annual return by five percentage points. On a $100,000 portfolio, that's an extra $5,000 a year. On a $1 billion portfolio, it's an extra $50 million a year. If someone can really earn that kind of extra return, they won't be working for you. They'll be working for the 1%.

And it's not only getting superior advice that's expensive. Just following it is expensive. Following any financial advice — good or bad — costs money, but not only is getting mediocre advice cheap, following it tends to be cheap as well. And that cost savings turns out to support your investment returns better than even pretty good advice does.

Go With Mediocre

Just looking for superior financial advice is fraught. Most people who say they're providing superior investment advice are wrong. Some are simply deluded, others are flat-out lying. Either way, you really don't want to follow their financial advice — following bad financial advice can easily cost you your life savings.

Fortunately, it's easy to tell the difference: Bad financial advice costs money, while mediocre financial advice tends to be free (or nearly so).

Where can you get mediocre financial advice? Lots of places. You might start with two books I reviewed here on Wise Bread years ago that provide just the sort of mediocre financial advice I'm talking about:

The Little Book of Common Sense Investing by John C. Bogle: A perfect capsule of mediocre investment advice. It's also really short, because you can say about all there is to say about mediocre investing in a really short book.
The Only Investment Guide You'll Ever Need by Andrew Tobias: A slightly longer book that also covers basic personal finance stuff — so, not just investing your money, but also earning, spending, and insuring it.

How to Know It's Mediocre

It's easy to tell if the advice you're getting is the sort of mediocre advice you want. There are two characteristics to look for:

It's free — or, available for no more than the cost of a book.
It doesn't claim to be better than mediocre.

If somebody charges money for their advice — or, more importantly, charges a commission, or a percentage of your assets for their advice — then it's probably not mediocre financial advice. (Charging a small fraction of 1% to cover the costs of running an investment fund is fine. It's charging extra on top of that for advice that's the danger sign.)

If somebody claims that their advice is superior investment advice, or in any way better than mediocre financial advice, then it probably isn't mediocre financial advice.

If you spot any of those warnings signs, I suggest that you avoid those advisers. It doesn't really matter whether they are people who genuinely think they're providing superior financial advice, or people who are just playing on your hopes for superior financial advice. If you follow their investment advice, I can confidently predict that your long-term investment returns — after expenses — will be crappy. And crappy returns mean a lower standard of living, less security, no chance to retire early, and maybe no retirement at all.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Going Off the Grid Is a Lot Harder Than You Think

Philip Brewer — Thu, 15 Dec 2016 11:30:12 +0000

The term "off the grid" has taken on an expanded meaning of late. It used to be used in a literal fashion, to refer to disconnection from the grids supplying power, gas, water, and telephone services. Lately it's come to mean something broader: disconnecting from what whatever parts of "the system" seem objectionable to you.

Some people want to disconnect from the financial system. Some people want to disconnect from the surveillance state. Some people want to disconnect from the globalized economy or industrial agriculture or consumerism. Any of these choices have both costs and benefits.

Take a look at some of your options.

Off the Grid on the Low-Tech Path

To go fully off the grid is to become self-sufficient — to produce all the things you need for daily living. This is only sort-of possible. That is, the technology to produce everything you need to live is very low-tech indeed — pretty much everybody lived that way for the past 100,000 years — but there are two problems, one of which is insurmountable.

The Surmountable Problem: It's a Hard Way to Live

There are two historical routes along the low-tech path. The more recent is subsistence farmer.

You can't just decide "I'm going to be a subsistence farmer" and expect to succeed at it. It takes capital (in the form of land and tools). It takes skills (that your grandfather may have had, but that you probably don't). And if you can acquire both of those things, it then takes long hours of year-round backbreaking work to eke out a meager existence.

You can live at a much higher standard of living if you work for money (whether at a job or at your own small business) and then use that money to buy the things you need. Even if you don't make much money at all — part-time work at minimum wage, or whatever you can make as a freelancer at this or that — you're still going to be able to live as well as a subsistence farmer.

Oh, the subsistence farmer will get better food. It doesn't get any fresher, more local, free-range, or organic than the stuff you grow yourself. The subsistence farmer also gets the huge satisfaction that comes from supplying your own needs with your own two hands. But if you really want to produce everything yourself, you're going to have to do without a lot.

You have to make a lot of choices about how pure you want to be. Each thing you want to learn how to make yourself — nails, let's say — means another big investment in tools (forge, anvil) and skills, and another huge amount of work that you have to do to produce enough nails for a project. And each thing you decide not to make for yourself — cellphones, let's say — draws you into the money economy, meaning that you need to produce a surplus, so you have something to sell beyond what you need to live on.

Although it would have been a lot easier in your grandfather's time (his parents had and could teach many of the skills that you're going to have to learn from YouTube videos), it's probably easier now than it was in the 1960s, when a lot of hippie types gave subsistence farming a serious try. At least you've got the YouTube videos.

There is a lot of stuff out there to help, if you're serious about giving something like this a try. You might start with my review of The Self-Sufficient Life and How to Live It here on Wise Bread from a few years ago.

Just for completeness, I should mention the even older low-tech path: The lifestyle of the hunter-gatherer.

As a practical option, this one probably doesn't even exist. Virtually all the land that is suitable to support hunter-gatherers is more valuable for some other use, and so it has been taken for that use. (Hunter-gatherers couldn't win fights with farmers even before firearms were invented.)

I suppose a wealthy person could buy a hunting preserve on a tract of land big enough to provide enough fish, game, and plants to support himself. If he did his hunting with primitive weapons and processed the carcasses with primitive tools (and kept to himself), he could probably get away with violating the rules on hunting seasons, fishing licenses, and the like. But it would just be a fantasy of living as a hunter-gatherer. As a landowner, he'd still be on the grid. (As a rich person, he'd no doubt be on the grid in all sorts of ways.)

Having said all that, hunting and gathering are both useful as ways to improve whatever lifestyle choice you end up with. Anything you can take from the wild is something that you neither need to grow nor buy. I talk about that in my post Foraging: Not Insane, Useless, or Impossible and Andrea Karim has posts looking at hunting and fishing for food and at gathering edible weeds. (Of course those barely scratch the surface of what hunting and gathering can do to supplement your diet in modern times.)

The Insurmountable Problem: You're Still on the Grid

A farmer needs to own land, and all kinds of grid attachments come along with that. You have to pay your property taxes, so you have to earn some money, so you're probably going to have to file an income tax return as well. If you need to earn money you're probably going to have to be able to market your products, so you need a truck, which means even more money, and even more grid attachments (license, plates, safety inspections, dependence on foreign oil).

There are other ways you can't get off the grid. The state is going to check and make sure your kids are getting a proper education. You can teach them yourself, but you need to be on-the-grid enough to do the paperwork. You need to have health insurance even if you don't want to avail yourself of modern medical care. Zoning regulations will affect how you can use your land. Federal marketing orders and agreements affect what crops you can grow, and the EPA regulates what you can do with wetlands on your property.

Because of these issues (and a hundred more like them), I've become enamored of late by the possibility of a different sort of path to off-the-grid living.

Off the Grid on the High-Tech Path

If you accept the fact that there simply is no way to live completely off the grid — if you abandon the purity aspect of the notion — another option opens up: You can go off the grid a la carte, picking and choosing where connecting to the grid is worth the cost, and where disconnecting is the bigger win.

The question you need to ask is "Why do you want to live off the grid?" If you understand the answer to that question, you can decide where to put your effort.

The Satisfaction of Providing for Your Own Needs

If this is what moves you, you can start right away. Think about what you need and start producing it.

Food? An intensively worked suburban plot can provide a large fraction of all the food a family needs, but you can start with just a garden. If you can have chickens where you live, you can easily be self-sufficient in eggs. You can certainly raise a few rabbits and substantially augment your household meat supply.

Clothing? Learn to sew. Learn to knit. Learn to weave. Learn to spin.

Shelter? Look into the "tiny house" movement. (There are several tiny house articles on Wise Bread.)

Producing your own stuff is only sometimes cheaper than buying it, but stuff you produce yourself can also be better than what you can buy (once you get good at producing it).

The Safety and Security of Providing for Your Own Needs

One downside of "the grid" is that you're so terribly dependent on it. If the power goes out, you're sitting in the dark. If a backhoe takes out the wrong cable, you've got no landline (or no Internet, or no cable). If the water company starts piping in water that's contaminated with lead, you're drinking from bottles until they clean the system.

You can replace most of these things in a grid-free fashion, although it often takes capital.

You can put solar panels on your roof and produce your own electricity. If you live out in the country, you can drill your own well and pump up your own water. You can even set up a biodigester and produce your own methane gas (although it might be simpler to harvest the occasional tree and burn wood rather than gas).

There's really no way to go grid-free for telephone and Internet, because the connection is the essence of the thing. But if you wanted to do it, the technical chops required to set up your own local network — one that covered your home or your neighborhood (or your walled compound) — is not beyond the capability of an ordinary person. Throw in some access points capable of establishing a meshing network and a server with ample disk space and you could offer folks very local networking that was completely independent of the larger grid, providing voice access to everyone within your local network and offering whatever you wanted to spin up on your server. (A local copy of Wikipedia wouldn't take up much room at all.)

The Morality of Providing for Your Own Needs

Things that you produce yourself can be produced in accordance with your own values.

You can be confident that no produce from your own garden was harvested by poorly treated migrant labor. You can be confident that no garment that you sew yourself was made by slaves or prisoners. Eggs from your chickens can be cruelty-free, cage-free, free-range, and organic to exactly the extent that you choose — and will certainly be extremely local.

Using power produced by your solar panels funds no overseas terrorist organization, drains no cash to money-center corporations, nor does it enrich the shareholders of the firms endangering our air and water with fracking, offshore drilling, or poorly maintained pipelines.

Where morality is not implicated, you can choose to stay on the grid. I don't live in a tiny house: I live in a town house — but it's a town house owned by a cooperative that I'm a member of. In essence, I rent it from myself. It's on the grid, but it's very much in accordance with my values.

Living large on a small budget makes it easy to live light on the planet, and that often goes hand-in-hand with high-tech, off-grid living.

The Flexibility of Providing for Your Own Needs

The technology of the digital nomad makes it possible to go off the grid in a very different way.

On the one hand, the digital nomad needs regular (although not necessarily constant) access to the Internet. That's as grid-connected as can be.

On the other hand, once you've arranged your life to allow you to be location-independent, you can be pretty indifferent to exactly which bits of the grid you choose to depend on, and you can shift around based on the circumstances of the moment.

You can live out of a suitcase and laptop bag, using the power and Internet available wherever you happen to be.

You can outfit an RV (or a van) with some solar panels and some batteries, add a few gigabytes of data to your cellular plan, and live and work anywhere you choose.

You can connect to the grid, work for as long as seems appropriate, and then disconnect whenever you want.

Being able to make these choices — and then make different choices when the circumstance (or your thinking) changes — is what I mean by the high-tech path to off-grid living.

High-tech or Low-tech, Capital Makes a Difference

There's a big trade off between self-sufficiency and self-reliance, and the more of what you need you can produce for yourself, the more options you have.

The grid is part of this. Replacing it requires a lot of capital. Doing without means taking a hit to your standard of living. This means a lot of hard choices, but each additional chunk of capital can turn one more hard choice into an easy choice.

I mentioned at the beginning that a subsistence farmer needs capital for land or tools. Many of the other strategies I've mentioned — such as getting your power from a solar array — involve substituting capital up front for monthly bills (and a reliance on the grid).

There is the option of going big on capital. If you've got enough money, you can be as local and off-grid as you want in sourcing your food, power, water, and so on.

If you lack capital, you're going to have to pick and choose which aspects of grid you chose to unhook from. Or else, you're going to have to accept a very low standard of living indeed.

In the end, it comes down to your values. Why do you want to live off the grid? What lifestyle choices support those reasons?

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Easiest Way to Invest in the World's Biggest Companies

Philip Brewer — Mon, 28 Nov 2016 10:00:06 +0000

Here's a classic way to build up an investment portfolio: Regularly invest modest amounts of money in growing companies. Do that for a few decades, reinvesting the dividends as you go along, and — if you've picked the right companies — you will end up with sizable holdings. Perhaps even real wealth.

If you want a diversified portfolio, and you really should, there are a lot of cheap ways to get one. Any number of mutual funds will let you open an account with a modest initial deposit, and the minimums for subsequent investments are quite reasonable for even a small saver.

But what if you don't like someone else's idea of a diversified portfolio? What if you have some strong opinions about which companies are worth investing in, and out of the thousands of mutual funds available, none of them focuses on those companies? What if you really want to invest in specific companies picked by you?

One option would be to open an account at an online brokerage and make your purchases there. That will work great if you have ample money to invest. But what if your free cash for investing is small?

Even small investments can add up to a lot of money, if you've got both time and a good annual return working for you. If the companies you pick can average an 8% annual return for 40 years, just $20 a week will build to a fortune of over $300,000.

But the online brokerage solution is no good for investments that small, because of commissions. Even the cheap online brokers charge $5 on a trade, and plenty of them charge closer to $10 — there's half your investment gone right there.

Fortunately, there's an alternative that's tailor-made for this situation: Direct Stock Purchase Plans, or DSPPs.

Direct Stock Purchase Plans

Back in my day they were called Dividend Reinvestment Plans, or DRIPs, but they're basically the same thing: Big companies hire somebody — usually the stock transfer agent — to create and manage accounts that let individuals buy small quantities of stock — usually for no commission — and reinvest their dividends.

It's a win for the investor, because they get to invest in the stock for free. It's a win for company, because they get a dependable stream of new capital, and a stable base of shareholders who are aren't likely to sell out at the first sign of bad news or to go chasing after the next hot trend.

Besides charging no commissions, they also solve another problem for the very small investor: the cost of whole shares. Suppose you want to invest $20 out of every paycheck, but the stock you want to buy is $63 a share. It would take you four paychecks to save up enough money to buy one share. With a DSPP you'd get 0.317 shares with the first contribution, and a similar amount each paycheck after.

Things to Know

There are a few caveats.

First, only certain companies go to the trouble and expense of offering a DSPP. Happily, as suggested by the title of this article, they're mostly the largest companies on the U.S. stock exchanges. The web has plenty of lists of companies that offer DSPPs or DRIPs. Alternatively, if you know which company you're interested in, go to the company website and look for a link like "investors" or "shareholder information." If there's a direct investment program, you'll find the information about it there.

Second, buying stocks this way — through numerous small purchases — may make figuring your taxes a lot more complicated in the years that you sell. (This may be less true than it used to be, now that brokers are required to track your cost basis for you.)

Third, be aware that these sort of plans don't offer the services of a broker. They are basically just for accumulating shares in one specific company. They will probably let you shift from reinvesting your dividends to receiving them in cash, something you might want to do when you retire and will be living off your investments. They usually let you take delivery of your stock (if at some point you want to transfer it to a regular broker) or sell it (if you have found a better investment, or need the money to live on). They won't let you borrow against it, they won't have cash management tools, they won't be interested in holding any other shares you own, or selling you bonds, or advising you on other investment opportunities.

Fourth, investing in just one company won't give you a diversified investment portfolio. You'd need a dozen carefully chosen companies to get something reasonably diversified. Of course, as an adjunct to some well-diversified mutual funds, a DSPP in a company that does very well, can provide a considerable boost to your total return, without completely unbalancing your portfolio.

History

Plans like these used to be a much bigger deal. Especially before 1975 (when minimum commissions were abolished), but continuing right up until Internet brokers got big in the 1990s, the costs to trade stocks were high enough that it was completely impractical for a small investor to gradually accumulate shares in a growing company. Investing in individual stocks was a game only for the wealthy.

It's generally not important these days, but there's a technical difference between DRIPs and DSPPs. Back in the day DRIPs usually required that you purchase your first share from a broker (or acquire it some other way, such as by inheriting it). Then you could reinvest dividends, or even make additional cash purchases of shares, but that first share had to come first.

Starting in the mid-1990s, the SEC relaxed some rules, making it practical for companies to offer DSPPs that could sell you your first share, as well as shares beyond that.

It's kind of a technical point, but that's the difference between the two kinds of plan.

Small Versus Tiny Investors

With internet brokers, even a fairly small investor can buy and sell stocks. You need a certain amount of capital — a few thousand dollars — to make it possible to buy a round lot of 100 shares and to make the $5 or $10 commission a small enough percentage of your total investment.

But if you're a tiny investor — if your investable capital is only a few hundred dollars — something like a DSPP makes it possible for even the smallest investors to accumulate sizable portfolios through frequent, modest investments made over a long period of time.

It's what they were designed for.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Has Cash Become More Trouble Than It's Worth?

Philip Brewer — Fri, 11 Nov 2016 10:30:27 +0000

You probably know people who have already quit using cash. I do. They pay their bills electronically, and pay for items purchased at stores with debit cards (or prepaid cards, or credit cards, or any number of alternatives like Apple Pay or Google Wallet).

Those people are making their choice based on what's best for them, but maybe society would be better off if people didn't have the choice. At least, that's what Kenneth Rogoff thinks. He's sure enough to have gone to the trouble of writing a book called The Curse of Cash to lay out why he thinks so, and to suggest a path to a (nearly) cash-free society.

Personally, I'm not convinced.

Rogoff's First Problem: Corrupt Transactions

That scale issue is what Rogoff wants to solve. Using $100 bills, you can fit $1 million in a briefcase. (You've no doubt seen the iconic aluminum Zero Halliburton case in movies. Its dimensions allow that much money, in new or used bills, to fit perfectly.) Drug lords, money launderers, human traffickers, gangsters, and corrupt businessmen can make and receive large payments in a form that's hard to detect and hard to track.

Rogoff's idea is that getting rid of large bills will make illegal payments much harder. Your average corrupt government official, Rogoff figures, is going to be a little less interested in taking a bribe if he's going to need a dolly to cart off a steamer trunk full of $10 bills. And if he does take the bribe, it's going to be so cumbersome to move, store, and spend the money as to make it a lot easier to catch him.

The idea that getting rid of large bills will reduce crime, and make criminals easier to catch, is not new. There were $500 and $1,000 bills in regular circulation in the U.S. until 1969, when President Nixon ordered them withdrawn for just that reason. There are still old bills in those denominations around, but they're mostly in the hands of collectors — and tend to sell for well over face value. They're still worth face value at a bank, but any that get deposited get sent to the Federal Reserve to be destroyed.

(Note that with those pre-1970 large bills, we're talking big money. Adjusted for inflation, a briefcase full of $1,000 bills in 1969 would have been worth the equivalent of well over $65 million in 2016.)

Rogoff isn't the only one thinking along these lines. Just a few months ago the European Central Bank announced their decision to get rid of their €500 banknote, on the grounds that it "could facilitate illicit activities."

For most of the past ten years a briefcase full of €500 bills would have been worth at least $6.5 million, although just at the moment it's only worth $5,520,350.

Even after phasing out the €500 banknote, Europe will still have a €200 banknote, worth about $220, so the euro will still come out ahead in the "biggest bribe in the smallest case" competition. (Although behind the $1,000 Singapore banknote, worth over $700, and the 1,000 Swiss franc note, worth over $1,000.)

Rogoff's plan would see the elimination of both the $100 and the $50 bills, followed eventually by the elimination of the $20. (Still later, he'd like to see the $5 and $10 replaced with coins hefty enough to be very unhandy for anyone carrying around more than $60 or so the average person has in his wallet right now.) These changes would make high-dollar cash payments almost impossible.

To enable all this, he'd like to see a few changes, the biggest of which would be the creation of subsidized bank accounts and debit cards that would be free to poor people. (The government has been moving in this direction for a while, with things like the Direct Express card. It's only good for receiving payments of federal benefits at the moment, but it — or the now common prepaid cards — could work for this purpose with modest tweaks.)

Rogoff's Second Problem: Negative Interest Rates

Rogoff's second reason for getting rid of cash has to do with the way the Federal Reserve operates.

The Federal Reserve adjusts interest rates with the goal of keeping prices stable while maximizing employment. They have some rules of thumb to guide them as to what the appropriate interest rate should be. Sometimes — such as the whole past seven or eight years — those rules of thumb have suggested that rates should be negative.

Negative rates are hard to make stick as long as cash exists. If your bank account would pay a negative interest rate — in other words, charge you a fee to hold your money — obviously you're just going to withdraw your money and hold it as cash.

Despite that issue, several central banks are experimenting with negative interest rates. So far, it's been working okay. If interest rates are only slightly negative, it's not worth it to go to the hassle of handling the cash, finding secure storage, insuring it, and so on. But what if the rules of thumb say that interest rates should be very negative? It would be worth it to rent a big vault and hire a bunch of armed guards, if the alternative was to pay several percent negative interest on $1 billion.

If there were no high-denomination bank notes — nothing bigger than a $20 — then pulling your money out of the bank and stashing cash in a vault simply wouldn't be an option. You'd be stuck taking whatever negative rate the central bank decided was appropriate.

Rogoff, who spent a good chunk of his career working at the Federal Reserve, thinks that would be great.

Going Cash-Free — Or Not

Rogoff's book deals pretty well with the practical issues of switching over, although he punts on a few. In particular, he figures that the infrastructure to make person-to-person payments with immediate settlement — the electronic equivalent to handing someone a $20 bill — will be created soon enough.

Cash Is Good at What It Does

However, the fact remains that there are plenty of problems cash solves very well. If you want to sell something that I want to buy, and if I have cash on hand to pay for it, we can execute the transaction without any third-party support. We don't need cards or a machine to read them. We don't need power or an Internet connection. We don't need a financial institution. We don't need a procedure to handle failures of any of those things.

Large denomination bank notes are quite handy for transactions modestly bigger than what we usually carry in our wallets. My wife and I have twice sold an old car, each time for a few hundred dollars. One buyer showed up with a few $100 bills, which I was able to quickly verify and easily count. The other buyer showed up with a few dozen $20 bills, which made completing the transaction much more of a production. (Just counting a few hundred dollars in $20s is a non-trivial undertaking for people without much experience doing so, let alone verifying that they're not counterfeit.)

Most of the other details, where cash seems more convenient than some cash-free alternative, are effectively dealt with in Rogoff's book. It's full of points to flesh out his proposal, even if he fails to acknowledge some of my personal issues, such as the value of bank notes as works of art, and their value as archetypal objects of yearning.

Leaving those trivial issues aside, there's still one big issue that keeps me from being on board with his proposal, which is that it traps everyone in a banking system controlled by the government — a government that is very likely to use the same tools they use currently (such as freezing bank accounts) in ways that will turn out to be vastly more coercive than they are now.

Cash Keeps You Free

Currently, if the government freezes your bank accounts, you lose the use of most of your money. The government isn't supposed to do this in a punitive fashion — it's just to make sure you don't abscond with the money before things get sorted out. But of course it is terribly punitive, and you're probably going to try pretty hard to sort things out with the government as quickly as possible.

Think how much worse things would be if it weren't just your savings that were frozen, but also your ability to make transactions. Right now if your accounts are frozen, you at least have the theoretical option of putting your finances on a cash basis. If there were no cash, you could literally find yourself starving in the dark because you couldn't buy groceries or pay your power bill.

Rogoff, I suspect, would wave that problem away as something that could be easily fixed administratively: There would be rules that would keep the government from freezing your bank accounts so severely as that, along the lines of the rules that already exist for garnishing your wages — transactions under certain amounts or for certain purposes would be allowed.

For me though, that's putting a huge amount of faith to put in those rules and the people overseeing them. After all, fundamental rights have been (and are still being) seriously infringed on the grounds that certain people were "suspected terrorists." Since access to a transaction account isn't currently viewed as a fundamental right, the threshold for limiting such access would be much more easily crossed. Who would object to freezing the accounts of suspected drug lords and suspected human traffickers? But why would it end there? Surely suspected tax cheats are bad people, and suspected deadbeat dads as well. What about people suspected of being behind on their student loans? (The government can seize most of your money for almost any debt you owe the government, but money from Social Security is safe — unless you're behind on your student loans.)

Knowing I have the option to put my finances on a cash basis is a source of considerable comfort to me.

Yes, the circumstances that mean I can put my finances on a cash basis if I need to also mean that criminals can put their finances on a cash basis. I'm willing to accept that, even if Rogoff isn't.

I like the fact that cash money just works, without depending on any infrastructure. It's one reason I've long suggested that you carry some cash.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Stay on Budget While Eating Paleo

Philip Brewer — Mon, 31 Oct 2016 09:30:20 +0000

Let's admit this upfront: It is calorically impossible to eat paleo as cheaply as you can eat a frugal version of the standard American diet. It's a simple fact that non-paleo foods like grains, potatoes, and legumes are vastly cheaper per calorie than the meat and fresh veggies that one associates with paleo eating.

But here's the thing: Nobody living in a rich country has any trouble getting enough calories. What's in desperately short supply are things like flavor, nutrition, and variety. A paleo-style diet gives you those things, and can do so at quite a frugal price, if you're prepared to be strategic about it.

Wise Bread writer Max Wong offers a list of 20 Ways to Eat Paleo for Super Cheap, and that's an excellent place to go for some specific tips. What I want to offer is a model for thinking about how to design a diet that's nutritious, paleo, and frugal.

Why Paleo?

Let's start with why you're eating paleo, which I'm going to speculate is for health benefits. I'm guessing that because you're calling it paleo (or primal or ancestral). If you had more social, environmental, or political motivations you'd probably use other terms — whole food, slow food, locavore.

It almost doesn't matter what you call it, because all these terms refer to ways of eating that solve the same problem: It's unhealthy to build your diet around eating large quantities of a small number of foods that mechanized farming and government subsidies have made super cheap.

Half the problem is that industrial agriculture tends to produce foods that are cheap, but less nutritious.

The other half is that those cheap foods are processed into ingredients for the industrial production of edible foodlike substances that are all the same. They may seem different from one another, but when you dig down, they're really all just sugar, fat, and starch from corn, soybeans, wheat, and potatoes. (Plus a little salt.)

And that sameness is the biggest problem, even bigger than the individual foods having lower quantities of important nutrients. We know from the historic and prehistoric record of agricultural people all over the world that it is possible for agricultural people to eat a healthy diet. But when agricultural people end up eating large quantities of just a few things, their skeletons show signs (such as stunted growth) of ill health. This brings us to rule one.

Rule One: Eat a Wide Variety of Nutritious Foods

Paleolithic people got variety automatically. It was a different kind of variety than modern people think of. We think of eating a wide variety of foods every day (because that's easy if you have a supermarket). Paleolithic people, on the other hand, ate a wide variety of foods every year — but many days they probably ate a whole lot of the same thing. On a day that they killed a large animal, it's likely everybody ate mostly meat. On a day that some kind of fruit was ripe, everybody ate mostly fruit. On a day that someone found a patch of tubers, I bet everybody ate a lot of tubers.

It turns out that's okay. Eat a wide variety of foods every year, and your body can handle a few days now and then when you eat a whole lot of the same thing. (It probably helps if there are also days when you can't find a lot of anything, and end up trying to fill your stomach with tiny amounts of a dozen different things scrounged up wherever you can find them.)

Nutritious foods are easy: just eat food, and not industrially produced edible foodlike substances. Yes, you can upgrade to organic (or local, or free-range, or pasture-raised), but just eating food gets you most of the way there.

Wide variety is trickier for us non-paleo people, because we do have a supermarket, so we have the option of just eating our favorite foods every day.

The rule "eat food" turns out to be a great guide to getting nutritious foods. My efforts to come up with a similar rule to guide us to getting a wide variety have not yet produced anything as simple or pithy. The best I've come up with so far is based on the fact the reason Paleolithic people got their wide variety was seasonality.

Rule Two: Respect Seasonality

Seasonality provides two great clues for anyone who wants to eat paleo on the cheap, but who is getting most food from the supermarket:

If it's always cheap regardless of season, eat it rarely.
If it's only cheap during a season, eat it in large quantities while it's cheap.

Taken together, these two rules solve most of the problems with the standard American diet. By rarely eating the stuff that's cheap all the time, you avoid the things that Paleolithic people rarely ate. By eating the good stuff in quantity when it's cheap, you get the wide variety you need without breaking your budget.

Finally, if you want to keep your overall diet under budget, we also need rule three.

Rule Three: Reject No Foods

Paleo is often described in terms of what not to eat, such as no legumes and no grains. But that's crazy. We know Paleolithic people ate both grains and legumes. (How do we know this? Because neolithic people domesticated both grains and legumes, and there's no way they'd have done that if they weren't already eating tasty peas and seeds of ancient grasses when they found them in the wild.)

Dairy is a special case. Paleo people probably never had access to milk, but lactose tolerance has evolved in humans at least twice (once in Europe and once in Africa). If you're descended from either of those populations, go ahead and consider that dairy may be a healthy food for you.

Of course, if you know that grains, or lentils, or dairy, or potatoes cause problems for you, then don't eat whatever it is. But, if you don't have specific issues with this or that particular food, go ahead and include it among the great variety of things you eat. Just don't turn foods like that into a major source of calories — or if you do, only make them a major source of calories for a few days, a few times a year.

What About Those Calories?

As I said earlier, it is calorically impossible to eat paleo as cheaply as eating a grain, potato, and legume diet. However, you didn't decide to eat a paleo diet because you thought it would be cheaper; you decided to eat it because you thought it would be healthier. If you have implicitly accepted the idea that it's going to cost more, the issue is how much more? And that brings us back to the title of this post. It's called "How to Stay on Budget While Eating Paleo," because the budget is the key.

Of course answering the question "How to eat paleo on a budget" with "Make sure the budget is big enough," is not what Wise Bread is all about, and that's why I started with rule one above. Following that rule, more than following anyone's fantasy rules about what Paleolithic people ate, is what's going to give you your best chance at good health.

Having said that, let me point you again to Max Wong's article, which is packed with ideas for getting paleo food for less. There are the obvious ways: gardening, fishing, gathering, gleaning, bartering, etc. There are the adventurous ways: eating organ meats, insects, or even roadkill. (See "snout to tail" cooking and eating.) There are the leftist ways, like joining a CSA, and the right-wing ways, like hunting your own meat. There are the simple ways, like buying more eggs, and the complicated ways, like raising chickens for your own eggs.

Even if you do all those things, it remains true that getting most of your calories from grains and legumes is going to be cheaper than any alternative. I actually have a post Healthy, Frugal Eating that walks you through creating a menu on that basis — but note that even it starts with vegetables.

If switching to paleo eating means skipping most of the grains and legumes, where do you get your calories? First, by eating even more fresh vegetables. Second by eating plenty of meat and nuts.

"But all those things are expensive!" you are no doubt saying, and yes, on a per-calorie basis, they are, and that's what your budget is for. You will get enough calories either way. How much money you're willing to spend will have a great influence on what form those calories take.

Following rule two (eat large amounts of whatever is cheap when it's in season) costs nothing and does not compromise your efforts to go paleo. You can get a bunch of cheap calories that way, and the seasonal variety comes along for free.

Once you're eating paleo, following rule three (allow limited quantities of less paleo foods) lets you upgrade the quality of your more paleo foods without seriously compromising the paleo-nature of your overall diet. A meal where you get half your protein from a legume might save enough money to upgrade the meat that provides the other half of your protein: grass-fed, pasture-raised, local, organic, or whatever upgrade means the most to you.

Paleolithic people followed rule one — eat a wide variety of nutritious foods — automatically. You're at a disadvantage — you have a supermarket — so it's less automatic for you, but you can follow rule one as well. If you do, you can eat paleo on a budget.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Prepaid Cards About to Get Safer and Better

Philip Brewer — Thu, 20 Oct 2016 10:30:08 +0000

If you have a bank account with a debit card, your money is pretty safe. If your card is lost or stolen, you can cancel it and get a replacement. As long as you check your statement and report fraudulent charges, you can get the money back.

For various reasons (poor credit history, lack of proper ID or a permanent address, etc.) a lot of people don't have or can't get a credit card or even a bank account. For them, the invention of the prepaid card has been a great boon in many ways — but has had its downsides.

For one thing, the consumer protection rules for prepaid cards are different — and worse. Fortunately, they're about to get a whole lot better, thanks to the Consumer Financial Protection Bureau, which has just published new rules for prepaid cards. (See also: 5 Best Prepaid Debit Cards)

Key Improvements

The new rules take effect in about a year. Here are the key improvements:

1. Fees Have to Be Disclosed in a Standard Format

Currently, there's no good way to compare one prepaid card to another. Their fees are different, their rules are different, and their dispute resolution policies are different.

Starting next year, fees and rules will have to be disclosed in a standard format, so that it will be easy to compare two different cards. In addition, the policies that they will follow if you dispute a charge will be standard across all prepaid cards.

2. Fraudulent Debits Have to be Credited Back

With a credit or debit card, you just have to report fraudulent charges to the bank promptly after you get your statement, and the bank has to investigate the charge. If their investigation shows that it was fraudulent, they have to give you your money back. (There are limits. If you authorize someone to use your card and give them your PIN code, the bank won't replace any money they take out of your account.)

For prepaid cards, the rules in effect right now allow the issuer to say, "Treat the card like cash, because if it's lost or stolen, the prepaid value is gone."

That's always been a pretty self-serving rule for the card issuers. They can just ignore thefts. (They're not obliged to even investigate, let alone give you your money back.) In fact, the issuers come out ahead when you lose a card. They can just keep the money, charge you an "idle" account fee, and then (maybe) turn over any money that's left to the state as "abandoned property."

The new rules make prepaid cards almost the same as credit and debit cards, but there is one key difference. With credit or debit cards, if the bank can't complete its investigation promptly, it has to give you your money back while it keeps looking into the matter. With a prepaid card, the bank can take extra time to make sure you're who you say you are before that clock starts ticking.

3. There Has to be Some Way to Track the Use of the Card

The deadlines for reporting fraudulent transactions to the bank start as soon as you find out about the transaction, or as soon as you get your statement. Since a lot of prepaid cards don't even have regular statements, there needed to be some kind of adjustment to that rule.

The bank can just start issuing monthly statements, but they'd really rather not. The new rules say they don't have to, as long as they do all these things:

Let you access your balance by telephone;
Let you access your last 12 months of transactions electronically;
Give you a way to get the last 24 months of transactions in written form on request.

4. Overdraft Fees Are Strictly Limited

The basic rule here is that banks aren't supposed to let you overdraw a prepaid card at all. They can only let you go negative on your prepaid balance if you have a deposit pending, or if the amount is less than $10 — and then only if they don't charge a fee for doing so.

To allow any other kinds of overdrafts, they have to get you to set up a separate credit facility, with all the usual rules for loan fees and disclosures involved in offering credit.

That's a summary of the main rule changes. If you'd rather see a video, the Consumer Financial Protection Bureau has you covered with this quick video summary of the new protections:

Still Under the Old Rules

Remember — for the next year, we're still under the old rules.

Still, even under the current rules things are better than things used to be, and the Consumer Financial Protection Bureau has done its best to make sure you can figure out what your rights are. They've got a webpage with the details of the limited protections that currently apply.

The new rules go into effect October 1, 2017.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

It's the 21st Century — Why Is Your Money Stuck in the 20th?

Philip Brewer — Mon, 05 Sep 2016 10:00:10 +0000

If you read financial advice these days, you could be forgiven for checking the date to see if you'd wandered back into the 1990s (or 1970s).

What was good advice for the 20th century? Go to the best college you can, get a good job, live frugally, save and invest, buy a house, and max out your retirement savings.

But all that generic financial advice of the 20th century isn't necessarily the surest route to success anymore. Millennials figured this out a while ago. That's why so many aren't bothering with college, why so many are living at home with their parents, and why so many are getting by with casual jobs — or no jobs.

Smart Moves for the 21st Century

So, what's the right financial advice for the 21st century? Well, Millennials' instincts aren't wrong. But these are hard waters to navigate purely on instinct. Here's what I'd do.

It's Not "Don't Go to College"

Rather, it's "Don't go into debt to go to college."

Even that is a bit extreme, because there are career paths — engineering, technology — where you can earn enough to pay off student loans. It would probably be even better to say, "Keep your student loans small, relative to your prospects of paying the money back."

In particular, don't pay up to attend a mid-tier college. In the 20th century there was real ROI in going to the best college you could get into. In the 21st century, I think that's only true at the top. If you can't get into (or afford!) one of the absolute top colleges, there's no reason to pay extra to attend a second-tier college. The cost-benefit ratio shifts strongly in your favor if you do a couple of years at community college and then finish your degree at a good state school. Of course if your family is rich or you can get excellent scholarships, there's no reason not to go to a second-tier college — just not if you have to borrow extra to do it.

Even if you can get into a top-tier college, consider whether its cost is justified. Will your degree ensure a job upon graduation, or result in better-compensated roles than you might otherwise have access to? Will it make entry into a graduate program of your choice easier? Will it materially benefit your intended life path in some way?

It's Not "Live at Home With Your Parents"

Rather, it's "Live a lifestyle you can really afford, even if that means living at home with your parents."

Do not go into debt to support your lifestyle! In fact, you'll be way ahead of the game if you can start accumulating a little capital. Even just a small emergency fund can make your life enormously better.

Other sorts of debt may not be as bad as student loan debt (which can't be discharged even in bankruptcy, and which lenders will give you even if your planned course of study gives you no hope of ever paying it off), but that doesn't mean the other sorts are okay.

It's Not "Work Casual Jobs"

Rather, it's "Find a way to support your low-cost lifestyle, even if all you can get are casual jobs."

There are all kinds of ways to make money. There are good jobs, there are crappy jobs, there are side gigs of all sorts. The key is to fund your lifestyle (plus a little extra).

In today's economy there are times and places where crappy jobs are all you can get. That's unfortunate.

Also unfortunate is that so many people writing about "kids these days" don't see that these two items are paired. Millennials are (very wisely) matching lifestyle choices with income opportunities, while journalists (and even financial advisers) are pretending that these two things are independent of one another.

All the Other Generic Financial Advice

Investing used to be easy.

From around 1980 through the end of the 20th century, just about any mix of cash, bonds, and stocks purchased through low-cost index funds would yield several percentage points above inflation, letting anybody be an investing super-genius.

Housing prices didn't go up in a straight line through the whole period, but between the tax advantages of homeownership and the leverage of mortgages with a low down payment, as long as you didn't pay too much, anybody could have both a home and a valuable capital asset.

Because none of this stuff is true any more, investing is now really hard.

The return on cash has for years been so close to zero as to be not worth worrying about. Bonds, stocks, and real estate are all up so much since the crash that they're probably a lousy place to invest new money.

None of which is to say that you shouldn't be frugal and accumulate some savings, but doing so will not be the path to wealth this century that it was last century.

That means that we need to look someplace besides the 20th century for financial advice. And for that, I have an idea.

Look to Earlier Centuries

The 20th century was genuinely different. For about two generations — the generation that fought World War II and the Baby Boomers — we had a unique set of circumstances that made it possible to work for a paycheck and eventually, before you got too old to work, get rich.

Until then, for all of human history, there were only two paths to wealth: You could inherit wealth, or you could achieve wealth through some sort of risk-taking endeavor (entrepreneurship, speculation, etc.).

Those unique circumstances no longer apply, and because of that, the best place to look for strategies for the future is to look at the strategies that worked before the 20th century. The 17th, 18th, and 19th centuries will provide fertile ground. Things that worked then are going to work better going forward than reflexively copying what worked in the 20th century.

Perhaps financial professionals can be forgiven for not having figured this out — the whole financial industry is a product of the 20th century.

I have a book of financial advice from 1883 called Worth and Wealth by T.L. Haines. It's a fascinating book. Much of it reads exactly like personal finance advice from today (minus any high-tech stuff like automating your bill paying) — getting an education, finding a job, living frugally, and so on — except that it has nothing about what we would consider investing. There's nothing about stocks or bonds. Instead, there's investing the way it was done in prior centuries.

Buy Productive Land

Land was the basis of all wealth right up until the 19th century. In the old days it would have been land with crops or pasture, but rental property counts too. Of course, both running a farm and being a landlord are more like a second job than like passive investing. Speaking of which...

Invest in a Business

That is, invest in your own business.

The sorts of paper investments — stocks and bonds — that did so well in the 20th century are not going to go away, and no doubt a lot of people will make a lot of money in the market. But I don't think we'll see a continuation of the days in which a simple diversified portfolio of stocks and bonds provided a safe, high return.

Of course, running a small business is more like a full-time job than like passive investing. And that's my point. The right response now to any the article on investing for "passive income" is to shake your head and say, "That's so last century."

Organize Like a Family

The idea of an individual person as the fundamental economic unit is an idea of the late 20th century. Before that the fundamental economic unit was the family.

There are all kinds of advantages to organizing your economic life around a family with more than one adult. It meshes especially well with the ideas I've already mentioned. Family members may work outside the family to bring in wages or a salary, but if there's family land or a family business, family members who lose their jobs can work them until they find a new job. That way the family still has some income and the family member has productive work to do.

One mental model for this might be the big farm families of the 19th century, but I suggest that you think bigger. Model your home economy after the aristocratic families of the 18th century. Everyone can contribute. The most able can be given scope to vastly increase the family's wealth, while the young and the old and those who simply lack that spark can still contribute to (and share in) the family's success.

If organizing like a family doesn't work for you, consider organizing like a tribe. It's probably an even better metaphor.

The Way Things Are Going to Be

In all these areas, I think that the Millennials' instincts have been pretty good, except that I think they've bought in on the 20th-century idea that the economic unit is the individual.

That's understandable. It's an appealing model, one that gives maximum freedom with minimal responsibility — you're only responsible for yourself.

Because of this, I worry that many of them, even those who are making the right moves on a piecemeal basis, have not figured out that the 21st century is going to look a lot more like the 19th and prior centuries than like the 20th.

The choices that they make — in particular, the choice to live at home with their parents — show them instinctively moving in the right direction, but until they can correct their mental model, they're missing out on some useful perspective that history can provide.

Look into how families organized their home economy before the 20th century. There's a lot of practical wisdom there.

Where is your money — in the 20th century or the 21st?

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

15 Ways to Make Money Outside Your Day Job

Philip Brewer — Thu, 19 Nov 2015 19:03:04 +0000

Extra money is great. At a minimum, extra income is more change in your pocket. Beyond that, it can diversify your income sources and make your finances less vulnerable to a disruption.

There are many types of non-salary income, but one way they're often divided up is passive versus non-passive. Consider these 12 sources of additional income.

Passive Income

Passive income tends to be investment income: Money you get for letting someone use your money or your stuff. Here are the classic categories of passive income. (By and large, this whole category is only available if you have money to invest.)

1. Interest

Interest is money you get from something like a bond, CD, or savings account, where someone pays you to use your money.

Not so long ago — before the financial crisis — there were plenty of reasonably safe interest-bearing investments that paid 3%, 4%, or even 5% over inflation. Those days are long gone. Now, CDs or bonds can barely beat inflation, and that's only if you're willing to tie your money up for a long time. Still, interest income can serve as a secondary income stream, and the opportunities are likely to get better in the near the future. (So, be careful about locking up your money for the long term at current rates.)

2. Dividends

Dividends are your share of the income earned by companies in which you own stock, and are also earned from baskets of investments that hold stocks, such as ETFs or mutual funds. Unlike the interest earned on a bond or CD, dividends can rise or fall unpredictably, depending on the success of the firm or the fund. Although some risky companies can pay high dividends, stable companies tend to offer modest returns, typically under 5%.

3. Rents

In theory, rents can be pure investment income, like interest and dividends, but in practice, being a landlord is more like taking on a second job — you have to find tenants, accept rent payments, keep the building maintained, deal with broken appliances, and so on. You can hire a management company to do that work, but that's an extra expense — and the income still isn't purely passive, because you still have the work of managing your relationship with the management company.

Still, rental income can be an incredibly flexible second income stream. Airbnb, RelayRides, and similar companies now enable individuals to rent out things like spare bedrooms, vehicles not in use, and earn extra income with less effort.

4. Royalties

Royalties are money that you get for letting someone make more limited use of something that you own. If an oil company operates a well on your land, they'll pay royalties. If a publisher sells a book that you wrote, they'll pay royalties. The possibilities are vast, and in essence include anything people can use — land, books, photos, patents, trademarks, etc.

It's worth noting that most people who sit down to write a book don't end up getting any significant income from it. That's probably even more true of people who sit down to invent something. Still, books, online stock photography, and even less-successful inventions can all generate extra income and diversify your earnings.

Non-Passive Income

Non-passive means you have to get out there and hustle up this extra income in your spare time. Some take a lot of hustle.

5. Working Another Regular Job

For someone working for wages, a second (or third or fourth) job is a classic source of extra income. If you're working for a salary, you'd probably be breaking your employment agreement to work another job, but there are ways to work for pay without breaking the rules. Check with your employer to determine your company's specific policies.

6. Working at an Irregular Job

Not all jobs require a regular time commitment. Some can be done on an ad-hoc fashion, such as:

Casual labor, like a handyman, house painter, gardener, house cleaner, or dog walker.
Freelance work (usually skilled or semiskilled labor done outside the range of regular employment), such as a web designer, photographer, adult education instructor, bicycle messenger, etc. Many occupations that fall into this category require special training, certification, or even licensing.
Seasonal work, such as a department store Santa, sheep shearer, etc.

7. Service Something That Makes Money

The classic option here is a vending machine. Your investment is modest — the cost of the machine, and the cost to stock the machine the first time. Your labor is modest — visiting the machine to restock it and remove the cash.

Vending machines used to be a great way to make a modest amount of money, especially if you knew someone who would let you put a machine in a reasonably high-traffic area either for free, or for a piece of the action. You could start small and then buy more machines. Back in the day when coin-operated video games were a thing there wasn't even any restocking needed — you just went as often as necessary to take out the money.

8. Running a Small Business

Running a small business can be a great way to make money from a source other than your salary. The range of options for small business are infinite. Just for starters, virtually all the "irregular job" items from the previous section could be just as easily arranged as a small business. Instead of painting houses or walking dogs, you start a house painting or dog walking business. Plus, running a business may confer certain tax advantages (deductions, anyone?) which can make it an even healthier secondary income source. The next two ideas can also be structured as small businesses.

9. Sell Something You Make

The list of things you can make and sell is endless — jellies and jams, soaps, jewelry, garden produce, baked goods, maple syrup, pottery, scarves, etc. I wrote a bit about the line between hobby and small business in my post Make Your Hobby Pay Its Way.

10. Sell Copies of Something You Made

This is a variation on the point above about royalties. Instead of letting another company sell copies of something that you've created in return for royalties, you can sell the copies yourself.

The classic case is self-publishing a book, but there are a lot of other possibilities that fall into this category. For example, If you know how to do something, you could create a video teaching how to do it, and then sell it on DVD.

This option really lends itself to digital sales, because the cost of production is zero — ebooks, online video courses, phone apps, etc.

It's tough to make much money this way, because there's so much stuff out there already, often for free. Sales are likely to be low, and unless you have a very narrow, very focused niche, you're going to face a lot of competition.

Still, this can be a win, especially if you want to create something for your own reasons — a phone app that does something you want a phone app to do, a drawing that speaks to you, etc. If you're making the thing because you want to, the extra effort to sell copies is quite small, and will probably bring in a little money.

11. Sell Something You Gather

There are still places where it's legal to collect things and sell them — mushrooms, pine boughs, sea shells, rocks, insects, etc. Success requires access to a place where you can collect, and usually requires more than a little skill in knowing what's worth collecting, and how to sell it.

12. Sell Something You Buy

If you can buy something cheap and sell it for more than it cost, you can make money on the markup. To make a reasonable profit, you usually have to add value in some way. The two classic ways are: Import the item, or repackage a cheap, bulky item into smaller units.

Importation: Say you find something sold overseas that you really like — a clothing item or a gadget or a tool — that just isn't a thing in the U.S. You can find the manufacturer, buy a modest quantity at wholesale, import them into the US, and sell them at a markup. Your added value is the capital to buy the stock and the effort handling the complexities of importation.

Repackaging: Almost anything is cheaper in bulk, sometimes a lot cheaper. My wife buys a brand of quilt soap that's good for washing wool. She can get it in 8-ounce bottles for $8 or $9 dollars — about $17 a pound. The stuff has a single ingredient: sodium lauryl sulfate, the detergent in baby shampoo. If you buy by the barrel, sodium lauryl sulfate costs less than $1 a pound — highly profitable, even after paying for bottles. Anybody can do the same thing with anything that's cheap in bulk but can be sold for more in reasonable quantities.

13. Teach a Class

If you have some skill — and if you also have some skill at teaching — you can make money offering classes. Where I live, people can arrange to teach classes through the park district, recreation center, the local library, YMCA, community college, and at least two different senior organizations. Many of the stores that sell arts or craft supplies also offer classes with local artists and craftspeople as teachers. And if you're adequately entrepreneurial, you don't need to teach under the auspices of some other organization at all. You can find your own students and teach out of a location of your choice.

14. Put Ads on a Website

Creating a blog or static website and putting Google Ads (or other affiliate programs) on it can generate extra income — just how much depends on the traffic and ad clicks your site generates. It's a competitive space, but if you can produce a quality site with adequate traffic, it may provide a regular source of additional income.

If you have some sales skills, you can also market your site to individual companies and get them to buy ads for a lot more money. That's another piece of work, however. It would make your income a little less passive, because now you're a salesman on top of everything else.

15. Create a YouTube Channel or Podcast

If you like making videos, this can be a source of modest income. If making videos seems like a lot of work, you're going to quit before you make any money from Google Ads on your YouTube channel. Still, if you make videos that go viral, there's the potential to make quite a bit of money. Some YouTube stars derive significant income from their videos.

Podcasts are a little more complex to monetize, because you don't have the option of just putting ads on the page somewhere; you actually have to include the ad in the podcast itself. On the other hand, the ads are worth more, because the listener is pretty much stuck listening to the ad from beginning to end.

There are podcast networks that offer tools to help with creating and making them easy for listeners to find. Some of them also have ad networks, although you'd probably make more money if you did the work of selling your podcast to sponsors.

How do you earn extra income?

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Get a Great Workout for Free With 11 Simple Moves

Philip Brewer — Fri, 31 Jul 2015 11:00:15 +0000

I belonged to a fitness center for most of 20 years. It was expensive (even with the corporate discount I got through my employer), but I scarcely regret the money. What I regret was the time I wasted trying to get fit that way.

The Modern Fitness Center

There have been gymnasiums going back to the ancient Greeks, but the modern fitness center was invented in the 1970s.

It was, to a considerable extent, the creation of a single man: Arthur Jones, the inventor of Nautilus machines. That invention, together with a couple of business practices that he championed, completely changed the economics of the fitness center business.

Before, a fitness center owner need to hire skilled trainers. Otherwise, clients wouldn't know where to start (and if they tried to just wing it, would probably hurt themselves). But with a few hours of training, anyone could teach someone how to use a Nautilus machine.

All by itself, that made fitness centers a highly profitable business. It didn't just greatly reduce the cost of staff; it also made it possible to cram a fitness center into a narrow strip-mall storefront (because you no longer needed the large spaces required by free weights, jump ropes, medicine balls, Indian clubs, etc.). On top of that, another of Jones's strategies — the notion that you should do one set to muscle failure, rather than doing multiple sets — increased the rate at which members ran through their workouts and departed, making it possible to sell more memberships.

Which is all fine, except...

Exercise Isn't Movement

Most people exercise, or at least mean to. But really, exercising is a strange thing to do. After all, animals don't exercise. Animals move. People move, too — they just don't move enough, because they're stuck sitting behind a desk for hours a day, stuck sitting while commuting to and from their desk, and very often sitting during many of their other activities as well — reading, watching TV, eating meals.

Exercise is something people invented as a way to fill that gap — it's an attempt to cover the bases very efficiently, so as to to fit a week's worth of movement into just a few hours.

But trying to replace movement with exercise is simply never going to work. No matter how efficient you (and your fitness center) are, you simply can't get a week's worth of movement in a few hours. What you need — what your body needs — is to move more all day, and that movement needs to be much more diverse than what you've probably been getting.

For all the nitty-gritty details on why exercise is no substitute for movement, and the physiology of how and why spending hours a day in the same few postures is bad for your body, the best resource I've found is biomechanist Katy Bowman. Her blog Katy Says has five years worth of careful explanations of how your body adapts to the way you use it, and why the adaptations to sitting for 10 hours a day can be reasonably expected to produce all sorts of problems. She also has a great podcast, and has written several books on the topic. (I suggest starting with Move Your DNA.)

Fit More Movement Into Your Day

Most people have spent years figuring out how to minimize movement — in the name of efficiency, but also because people are lazy. From that perspective, the whole idea of moving more on purpose may seem oddly backward.

For example, your office, kitchen, or shop has probably been carefully arranged with an eye toward putting everything you need at hand when and where you need it, and what I'm suggesting amounts to telling you to undo all of that. But the fact is, minimizing movement does all kinds of harm. What you want is almost the opposite: That you fill your day with natural movement.

If your goal is to fill your day with movement, the standard advice — park further away so you can walk, take the stairs instead of the elevator — is pretty minimalist. It will take more than that.

Since I don't know what your day looks like, I can only offer general suggestions, but here's a bunch of ideas.

More Movement for Desk Workers

The first thing to do is to just mix up your sitting position a bit. With a few boxes of different heights, you can improvise workspaces at the right height for sitting differently:

Sit on the floor with one leg tucked (and then the other, and then with both legs stretched out, and then with your legs crossed).
Kneel on one knee (and then the other)
Kneel on both knees
Squat
Sit on boxes or stools of various heights

Even if you mix it up, you shouldn't spend all day sitting. Maybe a standing desk (or even a treadmill desk) would be in order, but before resorting to that, try to fit in some standing and walking in simpler ways:

If you need to read a document but don't need to type, try angling your screen so you can read while standing at your regular desk.
Similarly, you can lie down on the floor to read a document, much as you almost certainly did as a teenager.
Take a laptop to the break room, put it on a countertop, and stand while answering email.
On days it's not too windy, take conference calls while walking outdoors.

I suppose some of those postures would appall an expert in ergonomics, but that's okay. Ergonomics is not the science of keeping you healthy; ergonomics is the science of keeping you at your desk as long as possible. If you want to be healthy, you need to move more. (You don't need to find the posture that lets you sit as long as possible.)

More Movement for Everybody Else

Add movement everywhere.

Something like a FitBit or an Apple watch or a phone running Google Fit is useful, mainly to remind you that all the short bits of movement — walking to the bathroom or to your boss's office or to a colleague's cubicle — all count.

Unless a medical condition like a joint replacement makes it unsafe, regain the ability to squat. If you can squat on your heels (the way everybody did every day before the invention of the chair), you can put that capability to good use every day. It's a good position for working, for cleaning, for getting things off low shelves, for picking things up off the floor, for weeding your garden.

Keep an eye out for things to hang from — bars, branches, etc. If you can't support your full bodyweight, just bend your knees or lean back and use your arms to support some of your weight, and gradually increase it. The ability to hang by your hands is useful in all sorts of ways besides saving your life if you find yourself unexpectedly in a scene from an action movie.

Movements

If you've been exercising, you've probably already got some specific movements in mind. Even if you haven't been, you've surely seen some lists of tips for fitting more exercise into your day — lists that almost always begin with walking.

Walking is great — it's arguably the definitional movement for human beings — and I'll get to it, but I wanted to point out some movements that are even more fundamental than walking. My list of natural movements starts with four that you almost certainly did before you even took your first step: Roll, crawl, squat, and stand.

1. Roll

Lie down on your stomach and (preferably without pushing into the floor with your hands or feet) roll over onto your back. Then (either continuing on the same way or reversing) roll back to your stomach. This will work your core, and remind your vestibular system of a whole range of possibilities that you otherwise scarcely experience except when you're asleep.

2. Crawl

Rediscover how to crawl, both on your hands and knees and your hands and feet. Once you can go forward for more than a few yards, expand your range to include crawling backward and crawling sideways. Once you have those covered, add in supine crawling, where you crawl on your hands and feet while facing upward. (That last seems like an odd posture on flat ground, but try going down a steep incline, especially one where the surface is loose or slippery, and it will instantly seem like an entirely sensible way to move.)

3. Squat

Squat down as low as you can without bringing your heels off the floor, then stand back up. Most people who've spent years sitting in chairs for a large fraction of the day can't squat very low, but the strength and flexibility will return surprisingly quickly if you spend a few minutes each day squatting.

4. Stand

The value of standing as an alternative to sitting burst into the public consciousness a few years ago, with many people switching to standing desks. Of course, filling your day with just standing is as bad for you as filling your day with just sitting — the point is to move, not to find a different static position. Still, if you always sit and never stand, standing more is a great idea.

5. Walk

Now we get to walking. Walking is the best. Walk as much as you can.

6. Run

Running is a popular form of exercise, although too many people use it as a way to cram their minimum daily requirement of aerobic exercise into the shortest time possible. Abandon that idea. Instead, making running one piece of your movement diet. Run when it's useful — when you want to get somewhere on foot in a hurry. Run when it's fun — when you feel like running. If you're running that much, you're probably running enough.

7. Climb

After walking, climbing stairs is a key recommendation for people trying to fit exercise into their day. Climbing stairs is great, but there are so many other things to climb! I suggest you climb them all: Climb hills. Climb ramps. Climb ladders. Climb playground equipment. Climb trees. Climb ropes. Climb boulders. Climb walls. Climb mountains.

8. Balance

Improving your balance is a key way to reduce injuries from falling. Practice standing on one leg. Practice walking on something narrow — a fallen log, a curb, a rail. If you're not ready for something more challenging, try walking along a painted parking lot line. Once that's easy, lay a 2x4 on the ground and walk along that.

9. Lift and Carry

There are many opportunities to fit lifting and carrying into your day. Instead of the grocery cart, get a grocery basket. Carry your groceries in, carry your trash out, carry your luggage, move furniture. Developing the strength and skills to lift and carry actual things — landscaping rocks, bundles of firewood — as opposed to just the strength and skills to lift a barbell or dumbbell — will stand you in good stead in all sorts of real-world situations.

10. Throw and Catch

You can throw little things like balls and you can throw larger things like sandbags or logs. Besides roundish things, you can throw non-round things like sticks (both cross-wise, so someone can catch it, and lengthwise like a javelin). Throw a frisbee with friends. If you don't have anybody to play catch with, get a rubber ball and bounce it off a wall.

11. Jump

You can jump down, you can jump up, and you can jump across. All are useful sorts of movement that are well worth rediscovering. In particular, jumping down just a little farther than you can step down is easy and very practical. Start by jumping down a distance of just one or two steps, and once that's easy, try jumping down three or four. Redevelop the capacity to jump down, and you can gain all sorts of opportunities for efficiencies in terms of getting from point A to point B — enough to replace some of the efficiencies you gave up as way to increase your opportunities for movement.

A good place to start for basic information on executing natural movements is MovNat. Created by Erwan Le Corre, MovNat advocates for and teaches natural movement. Just because movements are natural doesn't mean that you don't have to learn them and then practice correct form, and MovNat has generously provided a vast YouTube library with literally hundreds of short videos showing natural movements such as I listed above.

I'd suggest, though, starting with The Workout the World Forgot, simply because it's a beautiful visualization of natural movement.

Movement: The Natural Alternative to Exercise

Fitness centers aren't evil, of course. It's just that their whole focus is helping you exercise, and exercise is not what you need.

Oh, it's possible to get fit with exercise, and some people certainly make a valiant effort, coming up with workout plans that aim for the right mix of walking, running, cycling, lifting, yoga, and martial arts training.

My experience is that it's really hard. It takes a lot of time to get enough exercise, if you spend most of the rest of your day sitting still, and people come up with all sorts of tricks for fitting in their exercise. They get up early to go to the gym. They squeeze a workout into their lunch break. They put on reflective gear so they can go for a run after dark.

But as long as your exercise is a separate thing, there's never going to be enough of it. Unless you're independently wealthy, or you're a movie star or a fitness model and being fit is your job, there simply aren't enough hours in the day.

The solution is to quit exercising and start moving.

Everything you do has the potential for movement. Take advantage of that potential. Fill your day with movement. Then you'll be fit. And going to the gym to exercise will seem like a weird idea. Why exercise when you can move?

What are you doing to fit more movement into your life?

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Working on the Road: A Book Review for Professional Nomads

Philip Brewer — Fri, 01 May 2015 17:00:25 +0000

Nora Dunn's new Working on the Road may not be the right choice for those looking for a vicarious thrill, fantasizing about a more free life. But for those looking for actionable information — who are ready to make the jump and are looking for practical tips for avoiding missteps as they change their lives — it's worth the read.

And I should know: I took several different stabs at arranging my life to enable living as a digital nomad. (For more, see my Three Paths to Being a Digital Nomad, which ought to provide some context as a reviewer of this book. See also the disclaimer at the bottom.)

The Guide to Working on the Road

The book is very much aimed exactly where the title suggests — at someone working on the road, or planning to. If your plans are for merely going on the road or living on the road, there will still be useful material here for you, but you'll be wasting more than half the book.

On the other hand, the book's focus on work is by no means limited to any stereotype of the sort of work that's typical for the digital nomad. No kind of work is excluded, meaning that this book would be ideal for anyone whose goal is to be productive on the road. For example, I think it would be excellent for someone preparing to take a sabbatical (a sabbatical in the traditional sense — taking six to 12 months away from a regular job in order to undertake a significant piece of research or complete a major project). It would also be excellent for someone who thinks getting away for a year would help them finish a novel.

With working on the road being the focus, you won't be surprised to learn that's where the book starts — with a look at two big categories of working on the road: location-independent work, like freelancing or writing, and then work that needs to happen in a particular place, but where the places are accepting of people who come from afar and plan to move on, such as teaching English or working in the many branches of the hospitality industry.

There are sections on brainstorming for the sorts of things that you might need to do, and on how you might quickly develop a few extra skills that would enable working on the road (either as a complement to the skills you have, or as a whole new thing). There's also a good section on the sort of abilities, work habits, and self-knowledge you need to have if you're going to be successful.

Cost of Living on the Road

One of the few bits of the book that I have a beef with — and only because it's a personal peeve of my own — is the section on the cost of living on the road. Nora points out that, "Traveling full-time can actually cost far less than it does to live in one place."

This is true in the strictly technical sense that you can always find a more expensive way of life than the one you want to call less expensive. (It's exactly the same, except we buy three times as many toothbrushes.) It's also true in the deeper sense, that almost anyone can live a lot more cheaply if they're prepared to dramatically change how they live, and the shift to living on the road is going to be the sort of dramatic change that enables all sorts of economies.

I just always bristle at the implication that you couldn't just as easily — in fact, more easily — find all those economies without going on the road if you're prepared to make the same sort of dramatic change in the way you live. Let your lease run out, sell your car, donate all your stuff beyond what fits in a suitcase, and then rent a cheap room a few miles from your old neighborhood.

There are other savings besides those that come from choosing to make a dramatic change toward a cheaper lifestyle. One big one that is often a source of savings for people going on the road is that if you travel to a place where people are poor, things are going to be cheap.

However: I'd be willing to bet that there are places where people are poor very close to where you live now.

Most of the other sources of cost savings for being on the road are very specific as to time or place. For example, favorable exchange rates can make particular places very cheap, if your income (from your work on the road, or your savings and investments) is in a strong currency but your expenses are in a weak one. There can be some large tax savings, but they are highly dependent on exactly where you live and exactly how you earn your money.

Finally, there's the fact that being someplace that's really different provides novelty that can substitute for entertainments that you'd otherwise spend money on.

I've written about all this before, in an article called Live Abroad for Less (Also at Home). As I say, it's peeve of mine.

But the fact that Nora manages to push this precise button of mine should not be held against the book, which actually has a great section on managing your expenses. It presents examples of several different households — single folks and families, people who travel a lot and those who have a home base for extended periods, all at a range of different income levels.

Work-Life Balance on the Road

The section on work-life balance while on the road is excellent. In fact, it takes exactly the tone I'd have liked to see Nora take for the section on how it can be cheaper to live on the road. Working on the road does not magically give you work-life balance. Whether you're on the road or not, work-life balance comes from the choices you make about what work you do and what you expect from yourself. Just like with living cheaper, choosing to work on the road is inevitably a dramatic change in your life, and making a dramatic change gives you space to choose a better work-life balance. But it still comes down to your choices.

The stories Nora tells about her successes and failures along the way to work-life balance are instructive. She provides good tips on striving for a proper balance. (The tips are not much different than you'd come up with for someone who's not on the road, which is kind of my point, but they're good tips.)

There's a section on dealing with the fact that you'd probably had great expectations for the magic improvement in work-life balance that was supposed to come from working on the road, and dealing with the disappointment you'll probably face. There are specific tips for people on the road with kids, covering things like education.

There is some advice that's very specific to being on the road — for example, suggesting that housesitting can provide welcome relief for someone who's been staying in hotels or hostels or tents or RVs, and praising the advantages of slow travel.

Heading Out

There are two sections on things to do and how to do them, roughly divided into things to do when heading out and things to do before heading out.

This one section alone may make the book worth buying, for a certain class of reader. If you know you want to hit the road, know what kind of work you're going to do, and know how to support yourself on the amount of money you're going to have available, there are still some practical issues to sort out, and this chapter provides a solid overview of a bunch of them:

Dealing with official documents when you're halfway around the world from your file cabinet
Deciding what kinds of insurance you need
Managing your cash, and paying your bills when you don't have a local bank
Managing your investments when you don't have a fixed address
Figuring out visa rules as they apply to people who will be doing work of one sort or another

The material is nicely organized with a good focus on the arrangements to be made before you head out.

There's also a focus on things to do that will help enable a return to working at a fixed location, because you might want back into the world of working at a regular job for a regular paycheck. There are things you can do up front that will make this step easier, and this section mentions some. (I wrote an article with my own suggestions, aimed at people who were going to be working on the road for a specific length of time, who know they will want to option to return, called Fund Your Own Sabbatical.)

And there's a good list of things that are easier to do while you still have a day job, such as applying for credit cards.

Tools

There are two sections on tools, divided between regular tools and business tools.

The first is about the tools you'll want for everyday stuff (such as a phone) and for work stuff (such as a computer). It's about figuring out what you need, pros and cons of various choices, practicalities (like cables), and so on.

This section covers things like:

Backups for people working on the road
Information security
Getting paid on the road

The second section covers the broad category of things that working on the road make less predictable, more necessary, or more expensive than they'd be for someone working in a fixed location — internet fees, hiring an accountant, shipping and receiving, etc.

Expanding the Package

The review above covers just the book. There are additional resources that can be purchased with it, including some special-topic articles on things like dealing with your stuff, paying your bills, working on the road with a family, and dealing with property. There are a couple of interviews by Nora (one of someone who built up and then sold a personal finance blog, one of parents working on the road with kids), provided in both MP3 and transcript form. That material is all good. Whether it's worth the extra cost depends on whether it addresses something you personally really need to know.

This book is perfect for someone who has gone beyond the stage of just thinking that working on the road sounds cool, but who has not yet figured out any of the details — what they might do, how they might live, and where they should start.

Buy your copy of Working on the Road today!

Disclaimers

Nora Dunn is a fellow Wise Bread writer, and a friend of mine. The publisher provided a review copy of the book, and Wise Bread paid me to write this article (same as they pay for other articles I write). Wise Bread policy does not allow writers to benefit from affiliate links (any payment from the affiliate link will go to Wise Bread, not to me), and I have no other financial interest in the success of the book.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Simplest Way to Live Simply — And Cheaply

Philip Brewer — Wed, 17 Dec 2014 18:00:14 +0000

I moved this summer. Before packing, I did some decluttering, and took a lot of books to the used book store. And what I got rid of were my simple living books. Because, really, simple living is simple. It doesn't take a dozen books to explain it. It doesn't even take one.

I started buying books on simple living twenty-odd years ago. I was undergoing a minor crisis in my life. I was moving then as well, plus having some financial problems. I was having to reevaluate my whole future, and simple living was looking pretty appealing.

I read the modern classics like Duane Elgin's Voluntary Simplicity and Vicki Robin and Joe Dominguez's Your Money or your Life, and Amy Dacyczyn's Tightwad Gazette, and re-read the older classics, like Thoreau's Walden. (In the end, the only one I kept was Dolly Freed's Possum Living — and that one mainly for the chapter on moonshine.) They came at just the right moment in my life. They helped a lot. But I eventually figured out that there's a problem with writing a book on something as simple as simple living: It's so simple that you can't fill a book, unless you add a bunch of other stuff.

Because simple living is really simple. There's really just one idea: Prioritize the few things that really matter, and put aside everything else.

Beyond that, everything you're going to read about simple living is just tactics — ways to figure out what matters, ways to optimize your acquisition and use of those things, ways to get by without the other stuff, ways to fit into a society where you're something of an oddball.

And while simple living isn't complex enough to fill out a book, it's just about right for an article. So here's how to get started.

Figure Out What Matters

This is the core of the whole enterprise. In one sense, it's easy: What matters to you is what matters to you; what you want is what you want. Simple living isn't about wanting other stuff, and it certainly isn't about wanting less. It's about finding the essential core and focusing there.

Even so, this doesn't turn out to be an easy step, for a lot of reasons.

First of all, a lot of people don't know what really matters to them. Some people are deeply unsure about what they really want, and even people who have a pretty good grasp on it can still confuse what they want right now with what they really want on a deeper, more fundamental level.

Second, almost everybody needs to take other people into account. What matters most to you has to take into account what matters most to your spouse, your kids, and possibly other relatives as well. To some extent, you probably need to allow for what matters to non-relatives as well — your neighbors, your boss, teachers, students, people who work for you, and people who care about you. The balancing act of figuring out how much the desires and expectations of other people should affect what matters to you is necessary, even in those cases where the decision ends up being to go with your own thoughts on the matter.

Finally, what really matters to you isn't a fixed star. It changes over time. It changes as you learn and grow. It changes as your circumstances change. It changes as the world changes. So, you're always going to be dealing with a moving target.

Having said all that, here are some thoughts on figuring out what matters to you most, and focusing on those things.

The most crucial step is simply to think deeply about what matters to you. I wrote a post with some suggestions for how to start called Find Your Passion. That post includes a list of related links at the bottom.

Another thing that's worth doing is to Reverse Engineer the Best Time of Your Life. That is, think back to the best times of your life, and figure out what it was about those times that made them the best.

Yet another is to experiment outside your comfort zone.

Finally, it helps to be honest about what you really want, by recognizing that it includes things you may be taking for granted — such as a place to live, clean water to drink, and food to eat. I talk about figuring this stuff out in If Budgeting Isn't Fun, You're Doing It Wrong.

On negotiating this stuff with your family and others, I want to suggest two posts, one called The Line Between Frugal and Crazy, and one called It Takes a Frugal Spouse to Make a Frugal Home.

Optimize That Stuff

Okay, you've made the decision that simple living — this idea of simple living, where you focus on what's most important — is the way to go. And you've decided what is most important to you. Now what?

Well, now you live a life rich in whatever you've decided is most important.

That seems simple enough. Even easy, in a sense — what could be easier than doing whatever you want? But, of course, it's not that simple. You probably need to earn a living. You also have longer-term goals, and meeting those will depend on not doing whatever might seem most attractive right now.

Your key tool for successfully living the life that you have chosen is a budget. Besides the one I mentioned above, about how budgeting is fun, I've got two other posts on creating a budget: One called Refactoring Your Budget Categories (because how you categorize an expense makes a bigger difference than you might think), and another called A Better Way to Create a Budget.

The key is to remember that your budget isn't a constraint. You do have constraints, but they come from the real world. Your budget is a tool for helping you live a life of joy in the face of those constraints.

You can't go back and change the past, but except for the decision to have kids, there are almost no decisions that can't be revisited. Given time and effort, you can completely redesign your life — you can move, change jobs, change careers, go back to school.

You can alter every aspect of your life. Don't hesitate to do so, in your search for a life that's as fun and fulfilling as it is simple.

Get By Without the Other Stuff

There are many reasons for making do with less, and for some things, doing without is better than making do. But wherever you draw the line below what's most important, there will be things that just barely miss the cutoff. Those things are pretty darned important, but you've decided that, to live a simple life, you'll let them go. Deciding that is one thing. Living out your decision is something else.

The most common strategy among ordinary folks — folks who haven't chosen a simple life — is not to have that line at all. Instead of a sharp line, they have a long tapering off, where they have some of the stuff that's less important, just not as much than they really want. This strategy is, I think, a source of great misery. They don't just have less than they want of everything below the line. To pay for those things, they also have to make do with less of the stuff above the line — the really important stuff.

The point of simple living is that you get enough of all the most important stuff. Once you make that mental shift, the rest is easy. (There are plenty of mental tricks for dealing with the things that don't make the cut.)

Never forget that simplicity is not the same thing as being cheap.

Of course, you still have limited resources that you need to allocate. Wise Bread is full to bursting with suggestions on ways to do that effectively. I wrote one called Borrowing, Renting, Substituting, and Doing Without, and another called Five Ways to Live Better Without Spending More.

Fit In When You're an Oddball

Finally, there's the problem of being strange.

There are the internal aspects — you're bound to sometimes get grumpy when poor folks have better crap than you.

And there are the external aspects — your friends and family will sometimes find it tough to deal with your simple life. Your choices here fall into two general categories. One is Passing for Middle Class. If you'd rather not — if you'd rather just appear to be the oddball you are — one way to make it easier for others to accept is to Choose a Luxury Eccentricity.

In the past, I've sometimes cast simple living in terms of needs and wants: You satisfy all your needs, and then you satisfy your most important wants. But I think even that might be more complex than necessary. It's simpler to say: You get enough of all the most important stuff.

That's my idea of simple living. Not enough for a book, perhaps, but just about right for a Wise Bread post.

What are some of your ideas about simple living? Please share in comments!

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9 Problems You Can't Solve With Money

Philip Brewer — Thu, 04 Sep 2014 13:00:03 +0000

No matter how limitless your budget and how strong your arm, there are certain times when throwing money at a problem simply won't help. So take a look at the list below and ask yourself: Are you facing a situation whose solution might require thought and effort, as opposed to more bankroll? (See also: Your Money Problems Are Your Own Fault)

1. A Failed Relationship

A lot of relationships founder on the shoals of money issues, but even those can't be healed by throwing money at them — what they need is mostly better communication plus a generous dollop of willingness to compromise. And if the relationship problems aren't related to money, throwing money at it won't help at all.

2. A Mid-Life Crisis

It's a cliche of the mid-life crisis for a 40-something man to buy a red convertible, but it's not a purchase that's going to solve existential angst. Of course there's nothing wrong with buying a red convertible if you want one, and can afford it. It just doesn't solve any problems. (Not even the practical transportation problems that could be solved with a more practical car, really.)

3. Getting in Shape

Buying a gym membership does not improve your fitness. Neither does buying a treadmill, stationary bike, or elliptical machine. Regularly including appropriate aerobic, resistance, and flexibility exercise among your daily activities gets you into shape. (See also: 5 Ways to Turn Your Walk Into a Real Workout)

4. Acquiring Skills and Talents

Getting good at something is largely a matter of practice, and money is no substitute. Of course you can spend money on books, on classes, on workshops, and on tools, and all those things may be of some help, but they're not going to give you skills if you don't put in the time to develop the expertise (and they're certainly not going to give you talent).

5. Becoming Enlightened or Even Just a Better Person

There are always hucksters pretending to be one sort of spiritual guide or another, willing to take your money and show you the true path. There are also people ready to suggest that donating money to worthy causes makes you a better person. You can be confident that neither of those things is true.

6. Natural Disasters

It's very reasonable to spend money in advance of a natural disaster, to make yourself more prepared. A well-supplied pantry can really help you through something like a blizzard or a flood or an earthquake. The right tools and right supplies can turn a disaster into an inconvenience — or even an adventure. Money can also help some after a disaster is over. But no amount of money will turn back a lava flow, or get a commercial jet to fly through a volcanic dust cloud. (See also: 5 Emergency Situations You Must Prepare For)

7. Being Blackmailed

You know giving in to a blackmailer's demands just lead to more demands, right? You've seen this movie.

8. Wanting the Impossible

I'd like to spend the next 2000 years learning to be the world's greatest musician, greatest swordsman, and most eloquent Esperanto speaker, and then travel through time to play, fence, and argue with everyone history suggests might have been better at those things than I. Throwing money at that problem will not solve it — nor will it produce world peace, end hunger (or death, or disease), let me travel faster than the speed of light, or meet friendly aliens from other worlds.

9. Being a Happy Person

Money can buy things that you want, and money can certainly solve some problems — and if those problems are making you unhappy, then in that sense money can buy happiness. But research shows that happiness comes from other things. Things like doing good work and having the respect of your peers — things you can't buy with money.

The Three Questions to Ask

So, when is throwing money at a problem the right choice? I tend to ask myself these three questions before I decide to throw money at a problem.

1. Is the Cost Bounded?

That is, can you know up front how much money you're talking about? Is it a one-time expense, or would you be taking on a new recurring monthly expense?

It's easy to make the necessary cost-benefit analysis of a single payment. You have the information you need to decide if the cost is worth it — and if you can afford it.

If you're looking at solving a problem by signing up for a new recurring monthly expense, you're potentially talking about a lot of money. You're also making the analysis a lot tougher.

None of which is to say that recurring monthly expenses are never the right answer. Everybody has recurring expenses, and they're a perfectly reasonable way to cover the basic costs of living. But when you're talking about throwing money at a problem, you're usually talking about something less basic (and less long-term) than, for example, solving the problem of being homeless by renting an apartment.

The "being a happy person" problem fails this test, because even if this or that purchase would make you happy for a moment, no purchase will make you happy forever. The "being blackmailed" problem fails it as well.

2. Will the Money Solve the Problem?

Arguably, this ought to be the first question. If money won't solve the problem, then there's no point in throwing it — or even spending it. But in my experience, this question is so often hard to answer, while the other is so often easy, I find it makes sense to start with the other. If you answer that one to your satisfaction, then you come to this one.

What makes it hard to answer is getting a clear understanding of the problem.

For example, your car has broken down and you can't get to work. That's a problem where throwing money at it — paying to have your car repaired — may be reasonable. But don't stop your analysis there. To come to the right decision, you need to be sure you're getting to the fundamental problem. In this case, the real problem is that you don't have reliable transportation.

That's important, because making a needed repair does not always turn a car into reliable transportation. If this is just the most urgent of a list of needed repairs, maybe you need a different solution — a new car, or a good bicycle, or a bus pass, or an apartment closer to where you work, or a job closer to where you live.

Most of the other problems listed above — terminal illness, failed relationship, midlife crisis — fail this question.

That result is often heartbreaking, but it doesn't change the fact that whole categories of problems — medical problems, personal problems, political problems, social problems — often cannot be solved with money.

Save your money for the problems money can solve. Solve those other kinds of problems (if they can be solved) on their own terms.

3. Is There a Good Chance You'll Get the Money Back?

This is really a secondary question, after evaluating the cost of solving a problem with money. If a problem is clearly solvable, and the solution is easily affordable, you're probably not even thinking about it in these terms. (If the problem is that you're out of flour, and there's a grocery store a few blocks away that will sell you nearly unlimited quantities for less than a dollar a pound, then buying a bag of flour doesn't really rise to the level of throwing money at a problem.)

The third question becomes important when the cost of solving a problem with money is so large as to be a major factor in your budget — or especially if it will significantly impact your wealth.

Probably the most common circumstance is when you've sent a check, but it has gone astray. If you're dealing with a reputable counterparty, especially one with which you have an ongoing business relationship, it's usually fine to just pay again. Eventually one of two things will happen. Your first check will probably turn up and whoever has gotten paid twice will refund the extra payment (or credit it to your next bill). Or, if it never turns up, the money will never have left your bank account. (This is a good reason to pay by check. If an electronic debit or money order goes astray, you'll have to involve your bank in tracking the money down.)

Another common situation where there's a good chance you'll get your money back is when you have insurance. If your house burns down, your insurance company will probably pay necessary temporary housing expenses. If you're sick, your health insurance will probably pay necessary medical expenses.

Many times while traveling on business, I threw money at a problem, confident that my employer would reimburse me for those expenses along with my other business travel expenses — a legitimate move, because the money was solving a problem for my employer as much as it was solving a problem for me.

So sometimes, throwing money at a problem is the right move. But asking yourself these three question beforehand is always the right move.

How do you decide if money is the answer to a problem? Please share in comments!

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: