A Buckets Approach To Retirement Income

buckets

A buckets approach to retirement income: One of the most common questions financial planners receive from pre-retirees is, “What’s the safest way to give myself a paycheck once I quit working?”

Those who have been around long enough probably know someone who retired close to a particularly bad market year, like 2001, 2007 or 2008. Because that someone had to, or chose to, sell some investments at that terrible time, they ended up living off of much less than they originally thought. This can be a scary thing to watch. It makes some wonder, “How do I make sure that doesn’t happen to me?”

The Buckets Approach

Enter the buckets approach to retirement income. Below is a link to a video excerpt from the online course, “Retirement Readiness,” outlining a buckets approach in more detail. (A link to the course can be found at the bottom of this article and here.) A description for each of the buckets follows below.

https://youtu.be/mkeqzgJfeFc

Bucket 1 – Cash and Money Market Accounts

The first bucket will provide your paycheck. The rule of thumb is to
1) calculate any retirement income you will have (pension, Social Security, dividends, interest, rental property, for examples);
2) figure your annual recurring expenses (do not include one-time expenses such as replacing a car, roof, or paying for a special trip or wedding);
3) subtract 2) from 1); and
4) keep 1 to 2 years of that difference in Bucket 1.

For example, Justine retires at 65. She expects to live past age 82 so she is waiting until 70 to claim Social Security. She has a pension of $800/month. Her recurring expenses are $70,000 annually. The annual difference is $70,000 – $9,600 = $60,400. To start retirement, she decides to keep 1.5 years of the difference in Bucket 1 so $60,400 x 1.5 = $90,600. She puts that in a high-yield money market account and sets up an automatic transfer of $5833.33 monthly to her checking account. Voila – she has a new paycheck.

When she turns 70, she will collect $45,000 in Social Security. At that time the annual difference will fall to $70,000 – ($9,600 + $45,000) = $15,400. She decides to keep 2 years of the new difference in Bucket 1, so $15,400 x 2 = $30,800. She reduces the monthly transfer from the money market to $1283.33 per month.

Bucket 2 – Bonds, CDs, and Bond Funds

The second bucket replenishes Bucket 1. As the paychecks come out, the principal in the money market account will naturally decrease. When the balance reaches a level you have predetermined, a transfer is made from Bucket 2.

Bucket 2 is comprised of a combination of CDs, bonds, and or bond funds. CDs and bonds have maturity dates, so they are structured in a ladder (staggered maturity dates usually 6 to 12 months apart into the future). As each one in the ladder matures, the principal is either transferred to Bucket 1, or redeployed into a new CD or bond with a maturity date at the end of the ladder. If bond funds are used, they are laddered according to the duration in the fund, and the funds are sold as needed to replenish Bucket 1.

Bucket 3 – Stocks and Stock Funds

Bucket 3 replenishes Bucket 2 through harvesting gains in stocks. To do so, the general rule of thumb is:

  1. Review Bucket 3 on a regular but infrequent schedule (at most quarterly and at least annually). I
  2. f there are gains, transfer those to replenish Bucket 2.
  3. If there are no gains (i.e. the market is in a correction), then do nothing until the next scheduled review.

In this way, stocks are not sold at the most inopportune time. With up to 5 years of paychecks in hand, the first two buckets provide a secure cushion from market corrections.

Final Notes

It’s worth noting that whether the buckets are held in a tax-deferred account or a taxable account makes a difference. Buckets may be spread across accounts in different combinations to minimize taxes.

The goal of the Bucket approach isn’t to generate the best returns of any retirement portfolio on record, but rather to help prevent retirees and pre-retirees from selling at an inopportune time. Thus, a new retiree could use the bucket concept to replace their paycheck without worry about what markets are doing that month.

For a short online course on how to speak “finance” about retirement readiness, see Simple Finance Retirement Readiness: https://bit.ly/3p3BkXE.

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Minimalism, Kakeibo and Happiness

saving money

Minimalism, Happiness and Kakeibo: Minimalism trends have been around at least a decade. They contributed to the rise of the FIRE (Financially Independent Retiring Early) movement, where 20- to 40-somethings shared ways to “retire” before the conventional 60-something age. Much of the movement’s advice questions how much one really needs to spend to be happy.

While staying-at-home one morning in 2020, my husband and I had a heartfelt talk about the future. We began with guessing how the world might change; and then how our microworld-within-the-world might change. We braved scary thoughts about health, family, finances, and society. Then we shifted to how little we need to be happy.

Choosing Wisely

In other words, should scary stuff happen, we agreed to make a choice about our response to it. The pandemic helped affirm that stuff, even money, isn’t our highest priority.

It’s possible we aren’t the only ones coming to these conclusions. Minimalism might enjoy a pandemic-inspired boost. For example, in 2020 journalist Sarah Harvey described her discovery of the Japanese art of kakeibo (“kah-keh-bo”) in this article: https://www.cnbc.com/amp/2020/01/08/how-this-japanese-method-of-saving-money-changed-my-lifeand-made-me-richer.html

What is Kakeibo?

Kakeibo is the Japanese art of keeping a written financial ledger. Writing Harvey’s expenditures down brought their relative need (or lack thereof) into sharp focus for her. It helped her spend less by watching what she spent on. As a result, she chose more wisely in her spending.

For me, I already keep a spending journal, but joining Weight Watchers also worked the same way. By tracking what I ate, I quickly learned where excessive calories came from. As a result, I ate more mindfully. More frequently, I paused before grabbing the next snack. As a result, I chose more wisely in my eating.

So, kakeibo kind of works like Weight Watchers but for wealth.

Paring Down the Excess, Like, a Car

Looking at our spending during the pandemic caused us to wonder, if we are being forced to do without, what won’t we miss? While being forced to stay home, we discovered upsides to more home-cooked meals; more family time (even if on Zoom); more movies at home; and more neighborhood bike rides. More downsides were discovered to driving, commuting, and shopping in stores.

We began to realize – could we slow down, spend less, and actually be a little happier?

For example, because we got outside more, we met more neighbors. We stayed closer to home for socializing as well as shopping and working. In fact, I was using my car so much less that it began to feel like excess. Why were we paying insurance, license renewal fees, and letting it take up room in the garage? So In July 2021, we sold it.

Minimalism, Money, and Mindset

Like an ecosystem hit by a natural disaster, some parts of our old lives may now begin to feel excessive, or may crumble and not come back. Others will adapt and grow to take their place.

Having to make do with less highlighted that happiness is more dependent on our mindset than our stuff and our money.

What discoveries have you made about your spending in the last 2 years? Share a comment below.

For more psychology of money, tax, and funny video tips, subscribe to the award-winning monthly e-letter, “The View From the Porch,” at https://bit.ly/3t2uwfn.

For a short online course on how to speak “finance” about retirement readiness, see Simple Finance Retirement Readiness: https://bit.ly/3p3BkXE

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Document Your Digital Assets

document digital assets

Document your digital assets. Imagine you have a nearly $1 billion empire of music, movies, and royalties. Sound good? Now imagine you have no will, aren’t in a committed relationship, and have no children. Where and how do you begin to decide what should happen to your empire? Prince’s untimely death in 2016, and his lack of estate planning, brought to mind that the more we have, the more we have to plan for it.

Celebrities’ attorneys, accountants, and financial advisors try to keep up with constant changes to their clients’ property, especially when it comes to protecting intellectual property like music and videos. The longer a celebrity waits to address an ever-growing empire, the harder the decisions are to make for everyone involved. They find it’s better to address changes as they happen, even it means more frequent revisions.

Back in the Real World

So what does this have to do with little ol’ you? While you may not feel as though you have a digital empire, your online life might be more complicated than you think. It’s estimated the average American has between 30 and 80 online accounts with passwords.

For example, an attorney had a father-in-law who ran 3 businesses from his Blackberry. When he died suddenly in 2011, she was shocked at how difficult it was to access his emails, accounts, and online life. Every online provider had different requirements. This was her introduction to the concept of the “digital asset,” and, as a result, she became an expert in that niche.

Keeping track of digital assets can be overwhelming, but you can begin with 4 main types – personal, financial, business, and social:

Digital Personal Assets

Photos, Movies, Books, E-books, Music, and Podcasts. Unlike your Simon and Garfunkel records, Michael Jackson CD’s, or Rocky DVDs that the kids will get whether they want them or not, there are some e-libraries you can’t leave to anyone. For example, access to Kindle and iTunes libraries die with their owners.  For all your photos and videos stored in the cloud, make sure you have a backup, especially if it’s iCloud. Upon proof of death, all content in an iCloud account is deleted.

Digital Financial Assets

Bank, Brokerage, PayPal, Frequent Flyer, Bitcoin, etc. Did you sign up for paperless statements? Good for you, but make sure you have documented somewhere that the accounts exist. If no one can get into your email, and you haven’t kept good notes or a plan somewhere, they may not know you opened a new Treasury Direct account or I-bonds account.

Digital Business Assets

Blogs, E-books, Books, E-commerce sites. Intellectual property is often housed digitally. Have you inventoried any copyrighted works and addressed them in your estate planning documents? Can someone get to them in a way that will continue to produce revenue or royalties?

Digital Social Accounts

Email, Text messages, Facebook, Twitter, Instagram, Pinterest, LinkedIn, etc..  An elderly friend of mine passed away 6 years ago but his face and profile still pop up occasionally as someone “I might know” on my Facebook and LinkedIn. I am guessing his family either aren’t involved with social media, or simply were not able to log in and post a nice memorial tribute to a wonderful man. What do you want your online presence to look like, if at all, and for how long, once you’re gone? 

With all of these different accounts, it seems like you might need a digital asset will and executor. It turns out there are such roles now, and 47 states, including Florida, have ratified them through passage of the Revised Uniform Fiduciary Access to Digital Assets Act (UFADAA). (You can read all about it here: https://my.uniformlaws.org/committees/community-home/librarydocuments?communitykey=f7237fc4-74c2-4728-81c6-b39a91ecdf22&tab=librarydocuments). In the act, you can name a digital executor – someone to access your email, text messages, and social media accounts, in your will or trust.

Take a Few Minutes

Take a few minutes to consider how easy, or not, it will be for someone to take over for you. If you aren’t the paper notebook type, or just ready to reduce paper, check out either The Beneficiary Book at Amazon, or www.everplans.com.

For more tips on the psychology of money, subscribe to the award-winning monthly e-letter, “The View From the Porch,” at https://bit.ly/3t2uwfn.

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2021 Book Reviews

books

2021 Book Reviews: Last year I read or listened to 48 books. That’s not a number particularly worth bragging about (I think my bookworm mother probably read twice that many). But, it was enough that I felt like I was learning, re-learning, or being entertained from other authors constantly.

Of the 48, below are those selected for recommendations this year, arranged by topic. For past recommended books, check the Resources page. It includes other recommendations for finance, lifestyle, and life improvement books.

Fiction

19 of the 48 I read were fiction. Of those, The Dictionary of Lost Words, by Pip Williams, was my favorite. Taking place in Oxford, England in the late 19th and early 20th centuries, it chronicles how certain words were left out of the original Oxford English Dictionary. Told from the point of view one of the original editors’ daughters, it reveals the subtle dismissal of women, of the poor, and the uneducated through leaving out their vocabulary. The daughter, who starts out as a youngster underneath her father’s working table, makes her own collection of “lost words” that were literally left on the cutting room floor. Ultimately she becomes a respected scholar, though still with the inferior rank of being a woman in a man’s profession. Women in male-dominated professions everywhere will relate well to this story.

Psychology of Money

I always include this topic in the annual book review list. Last year finally saw the publishing of a book with the actual title The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, by Morgan Housel. Housel reviews the many different tricks our minds play on us when it comes to money, why, and what we can do about it. The field of behavioral economics, upon which the book is based, is difficult to explain in layman’s terms, but Housel does an excellent job.

Finance

Reverse Mortgages, by Wade Pfau, Ph.D. Dr. Pfau upended the financial planning profession nearly 7 years ago when he published research saying, “Financial advisors are not doing their jobs if they aren’t at least considering reverse mortgages.” Initially brushed off, subsequent independent studies have confirmed his findings. Regulations have tightened and these products have evolved into a legitimate option for many different financial goals. His book outlines the details, which can be quite complex, but understandable to non-professional readers. It’s now a reference book on my shelf. I am including it here for the second year in a row because I referenced it enough in 2021 to have read it again.

Life-Improvement: (also known as “self-help”)

Deep Work: Rules for Focused Success in a Distracted World, by Cal Newport, was a perfect segue from reading “Rest” two years ago. Both books emphasize the importance of pausing, rest, and breaks in doing work that requires great focus. Newport begins by listing all the ways that society and our screens keep us distracted. We end up working mostly on superficial tasks. To get into the deep work space, most people require a great deal of uninterrupted, undistracted focus time. In the past, I would try to squeeze in that time between working on the superficial tasks.

As a result of reading the book, I made more changes to the calendar. Larger blocks of time are now set aside for client meeting time, preparation, and followup, in addition to writing time. So I might have 10 days straight of meetings, followed by 5 days of writing and working on course development. I cannot report, sadly, that I am sticking to the plan as well as I thought, but I can definitely sense improvement. (To clients, you may experience longer than expected email response times. But hopefully the responses will be better thought-out than before.)

Life-Improvement XXtra Help

These next two are perhaps controversial and definitely don’t belong on a financial planning reading list, but I learned so much from them I want to include them. Along with money, sex and our sexual anatomy are the most under- and mis-communicated, misinformed, and misunderstood topics in our society. These two books spell e-v-e-r-y-t-h-i-n-g out in simple, understandable, relatable and occasionally humorous terms. If all adults of all ages would read BOTH: The Vagina Bible: Separating the Myth from the Medicine by Dr. Jen Gunter and The Penis Book: A Doctor’s Complete Guide – From Size to Function and Everything in Between by Dr. Aaron Spitz, oh, how much happier we all would be. I considered giving both books to my adult nieces and nephews for Christmas presents but realized they might not open them, and I still want them to visit me once in a while.

What books were life-changing for you in 2021? Let me know in the comments below.

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Honey, Ain’t Money Funny? 4 Ideas For Couples’ Money Convos

Couples and money

Honey, ain’t money funny? Sometimes, not so much. As Valentine’s Day came and went, a couple struggled with questions about consumerism, the meaning behind gifts, and how money affected their relationship. Whether it was financial inequality, overspending, or miserliness (a la Scrooge), humor was hard to find at a time when they were surrounded by hearts-and-happiness messages.

What can couples do to have a better relationship with money? Following are 4 ideas. For each one, it’s a good idea to plan a special fun reward or celebration at the end. The more you practice at these, the easier the conversations will get. You may find your differences become predictable, manageable, and even laughable.

Idea 1: Try a Monthly Money Date

For monthly money dates, quickies are best. These are for checking the “dashboard indicators” in your household finances. Agree to limit these conversations to about 15 minutes. A 2 1/2 minute video on 3-Part Money Dates can be found here: https://www.youtube.com/watch?v=7TWFKfF0vRQ.

Build in fun and humor by focusing on your progress, positive wins, and gratitude for what you’ve got so far. For big ideas and thorny issues, make a separate date to discuss those using one of the following 3 formats. Then move on to the “real” date part!

Idea 2: Try a 2-Day Relationship Conference

No you don’t have to talk about money for 2 days. What a buzzkill! Instead, in a Relationship Conference, each partner takes a turn being a pure listener to the other partner’s issues. Being the listener in a relationship conference means saying nothing while your partner talks. You can decide on the timeframe, but make it somewhere between 15 and 45 minutes. You can take notes. Take a break for 24 to 48 hours and allow thoughts and feelings to arise to reflect on what you heard. Share those with your partner by reversing roles – it’s their turn to simply listen and reflect for whatever timeframe you decide – 24 to 48 hours. Summarize how you both felt about the Conference. Then celebrate your ability to tackle tough stuff.

Idea 3: Take Turns Active Listening

Another option is to take turns all in one setting being the active listener. This means being fully present to your partner’s issues and emotions without bringing up your own responses or emotions. (Tip: This is really hard for most people who have never done it before.) You do this by repeating back what you heard, checking with them to make sure you got it all (“Did I get it all?”), and asking to hear more about the emotions underlying each statement (“You said you felt excluded. Tell me more about that.”) Once your partner agrees they feel completely heard and understood, then it’s your turn. Remember to celebrate and give yourselves credit for your progress with active listening.

Idea 4: Ask For Practice Help

Are there some money issues in your relationship that sound too difficult to talk about on your own? Sometimes each of these exercises work best if practiced with a counselor first. And that’s ok; sometimes we need training wheels before we’re ready to ride the conversation bicycle on our own. Give yourselves the gift of an enhanced relationship by getting some tips on how to have a healthy conversation about money.

Remember when you learned to ride and then let go of the handlebars? Imagine feeling that free in your relationship with money and each other. One’s Scrooge to the other’s spending might actually be something you learn to laugh about for years to come. You know you’ve arrived when you find yourselves saying, “Honey, ain’t money funny?”

For more tips on the psychology of money, subscribe to our award-winning monthly e-letter, “The View From the Porch,” at https://bit.ly/3t2uwfn.

For an online course on couples and retirement readiness, see the Simple Finance page at: https://my-simple-finance.thinkific.com/courses/retirement-readiness-signature

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Monthly Money Dates

couples and money

Monthly money dates sure don’t sound very romantic. However, it’s said that money and sex are the two biggest reasons for divorce*. Could it be just a coincidence they are also two of the most difficult topics for couples to discuss? So perhaps it might make sense to figure out how to talk about them. Making regular times to talk about a difficult topic can often break down walls within other relationship areas.

In fact, a money date doesn’t have to last that long. Probably at most 15 minutes. (Unlike that other difficult topic, quicker is better.) One suggested format for a money date has 3 parts, with each partner taking turns:

For Part 1: “Here’s what I contributed this month.”

And Part 2: “Here’s what I see for major expenditures coming up.”

Then Part 3: “How are we doing?”

Money Date Part 1: What You Contributed

First, telling what you contributed, no matter how big or small, starts the conversation with recognition for your efforts. If one partner stays home or is out of work, find a way to recognize other ways you contribute – whether it’s nurturing the kids or searching for that next great job.

Money Date Part 2: Upcoming Expenditures

Second, talking about what’s coming up, or could come up, leaves little room for unpleasant surprises. While this may be the hardest part of the conversation, it’s placed here for a reason. Psychological studies show that thinking about how much we spend or have spent can induce the same emotions that lead to depression. On the other hand, counting what we have induces the same emotions that lead to happiness and fulfillment. That’s why the spending question is sandwiched between the other two.

Money Date Part 3: How Are We Doing?

Third, how well you are doing? Ask, what goals are worth tracking? If you are unsure where to start, try the following four indicators: retirement accounts; savings levels; debt levels; and charitable giving. Rather than constantly comparing to an ideal number, find a way to recognize progress from where you were at some point in the past. No matter where you might see room for improvement, walk away with at least one thing you can both point to and be glad or hopeful about.

Money Date Wrap-up: What Next?

Sharing your hopes and working through challenges about money decisions, even for 15 minutes, can be an intimate couples exercise. If you follow this formula successfully, you might find you’re a little more interested in that other intimate topic that’s hard to talk about. (And feel free to take longer than 15 minutes for that one.)

For more tips on the psychology of money, subscribe to the award-winning monthly e-letter, “The View From the Porch,” at https://bit.ly/3t2uwfn, check out Holly’s book, The Mindful Money Mentality: How To Find Balance in Your Financial Future, or sign up for the online Retirement Readiness course.

*see Dr. Dae Sheridan’s Tedx Talk, “Real Talk about ‘The Talk'”

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New Year: Where’s Your Notebook?

Keep important data in a Notebook

It’s a new year: where’s your notebook? You know, that one with all of your passwords, account numbers, doctor names, and that very important song that must be played at your funeral.

Yeah, that notebook. Where is it? It might be a digital file folder on your computer or in the cloud, or it might be a pile of papers in a file cabinet, or it might be nice and neat in an old-fashioned 3-ring binder. The new year is a good time to ask: how easily can someone who needs it find it?

Notebook Update for Tax Season

Right after New Year’s season comes tax season. The end of January brings tax notices from bank accounts, investment accounts, mortgage statements, health insurance, employers, IRA providers, and more. Many take this opportunity to pull together scattered pieces of their financial life. While you’re at it, consider collecting everything not only for the accountant, but also for your family. The Notebook is a vital reference for your loved ones, just in case you’re not around, or not able, to do it yourself. If you already have a Notebook, now is a good time to review it.

One way to keep the notebook updated is to check each tax statement and match it up with a corresponding account in the notebook. Perhaps you forgot about those I-bonds you bought back in December on Treasury Direct. Better add that account to the Notebook. All those deductions for insurance from your employer – would someone know how to access the insurance companies if needed? That contact info is a good update for the notebook too.

What Goes in the Notebook?

In essence, the Notebook is a central place you keep stuff in case something happens to you. Many people have some kind of a notebook or desk drawer, but often have a few items missing.

Common and essential items in the Notebook include:

  • Your five basic estate planning documents: original will (drafted by an attorney in the state where you reside), living will, health care surrogate, durable power of attorney, and HIPAA designations.
  • Advanced estate planning documents: trusts, partnership agreements, business buy/sell agreements, shareholder agreements, etc.
  • Insurance policies. ALL of them: life, long term care, health, property, car, boat, liability, and any others.
  • Contact information for professional advisers: attorneys, bankers, accountants, investment advisers, insurance agents, and (of course) your Certified Financial Planner™.
  • Also, if your adviser has an assistant or paraprofessional who knows you and your situation, write down their contact information and a little note to that effect. (“Sharon is the assistant and she runs the whole place.”).
  • All of your health care providers – doctors, dentist, optometrist, veterinarian (who is going to take care of Fluffy?). Put similar information by each one – what they helped you with and if any office or nursing staff know you and your history.
  • Important to remember also, directions on how to find your financial stuff: digital password manager, online user ids and passwords, bank statements, investment accounts, real estate deeds and mortgages.

Extra Items for the Notebook

In addition, not-as-essential items some people include are:

  • An “ethical will” outlining your values. This often gives family members guidance when they are unsure what you would want. Writer Susan Turnbull’s book, The Wealth of Your Life, can help guide you through this process.
  • An end-of-life health care management booklet, like Five Wishes.
  • An Aging Plan – describing your wishes for the potential time of life when you may need assistance with activities of daily living, transportation, and housing transitions.

Think of your Notebook as a bread crumb trail helping your loved ones work backward in your footsteps. A little extra investment of time at tax season will be worth the effort.

Got a Notebook already? Comment below on what makes it uniquely yours. Share your best ideas.

For more on this topic, see The Mindful Money Mentality: How To Find Balance in Your Financial Future. Or to schedule a call to talk about Notebooks and staying organized, schedule a call.

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What Is Financial Anorexia?

What is financial anorexia? Financial anorexia is a type of spending disorder. People who suffer from the eating disorder of anorexia may obsess about food and the number on the scale. People who suffer from the financial disorder may obsess about money and the number on their statement(s). For those suffering – and it is indeed suffering – from financial anorexia, they never believe they have enough to enjoy what they’ve got.

According to Ken Donaldson, LMHC, a licensed mental health counselor in Seminole, Florida, “Anorexia is characterized by a distortion of perception.” Someone suffering from the eating disorder believes they still need to lose a few extra pounds, when to everyone else it’s clear they are harming themselves. Someone suffering from the financial one believes they still need more money, when it’s clear they are depriving themselves.

While the eating disorder of anorexia can be fatal, financial anorexia can be dangerous to mental health, friendships, and family relationships. Think about how it feels to be with someone engaged more in extreme deprivation than in enjoying life’s simple pleasures.

Where Does Financial Anorexia Come From?

Anorexia is fueled by isolation – the more the sufferer depends upon their own distorted perception, the worse their condition becomes. For example, Ebenezer Scrooge (in the beginning of Dickens’ tale), is an isolated penny-pincher and money hoarder. He is the stereotype of the financial anorexic.

Additionally, our culture still worships conspicuous wealth and Twiggy-like figures. “You can’t be too rich or too thin,” sums it up.

Most people understand the “too thin” part, but “too rich”? Is it possible to be “too rich”? Financial anorexics typically accumulate an abundance of resources. Their wealth does not come from a healthy relationship with money. Rather, fear is at its root. They might be “too rich” for their actual needs. Further, the more they have, the more they have to lose, or fear losing.

What are they afraid of? Fears might include:

  • that it will disappear tomorrow in a catastrophic world event;
  • a very expensive health issue;
  • hyper-inflation;
  • becoming dependent upon adult children;
  • “spoiling” family members; or
  • that self-worth will fall in lockstep with net worth.

Certainly some of these things can and do happen. Yet our societal messages, and brains wired to look out for danger, emphasize catastrophic scenarios past the point of their actual probability. At some point in life, many financial anorexics realize, to their immense regret, that they worried more about what might happen, and didn’t, than enjoyed what they actually had.

What Can Be Done About It?

Exposure to new information sources is one method of help. According to Donaldson, “New information will disrupt the pattern.” Support groups, a counselor, and therapy can provide external points of view. For financial anorexia, a visit with an understanding financial professional, who can provide concrete reassurance, often is a good first step.

Sometimes the new information has to come from, unfortunately, from a painful life-altering event. How did Scrooge turn around? By exposure to his past, present, and future if he continued on his course. The Ghosts of Christmas Past, Present and Future showed him more to be afraid of than the fears he made up for himself.

At some point, it makes sense to ask a few questions:

What were all those years of saving for?

How much is too much to spend on seeing family or friends one more time per year? 

How soon is too soon to leave a stressful, unhappy job if it’s taking years off of your life?

What is it truly worth to take the trip (safely, of course) you have been dreaming about for so many years?

How much is too much to spend on self-care like a massage, therapy sessions, or a manicure?

What if the thing to be afraid of is completely unknowable right now and wouldn’t be solved with money anyway? What would change?

Working With an Understanding Professional

A 2017 study sponsored by the CFP Board supported the psychological benefits of working with a financial professional. The study concluded, based upon a survey of over 800 consumers, that, “Working with a CFP® professional ultimately removes the negativity consumers experience relating to their finances and instead elicits feelings of confidence, optimism, ease, and security.”

Confidence, optimism, ease, and security. Those sound a lot better than catastrophes, worry, and fear.

How do you want to feel about your financial future? Share your thoughts below.

Want more information about financial psychology? Sign up for our monthly e-letterschedule a call, or check out Chapters 1 – 3 of The Mindful Money Mentality: How To Find Balance in Your Financial Future.​

Continue ReadingWhat Is Financial Anorexia?

Eyes On I-Bonds

Eyes on I-bonds: As described in the extensive post (link below) from Michael Kitces’ Nerd’s Eye View blog, I-bonds are bonds issued by the U.S. Treasury that pay an interest rate partially pegged to inflation. The rate resets every 6 months, on November 1 and May 1. They are primarily purchased electronically using an online treasury direct.gov account.

Nerds Eye View post on I-bonds: https://bit.ly/3p87K5Z

TreasuryDirect site to purchase I bonds: https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

I-Bonds Historic High Rate

For November 1, 2021 – May 1, 2022 I-bonds will pay a whopping 7.12% annualized rate (so 3.56% for six months). This is the highest rate since May 2000. Read below and more above at the Kitces and Treasury links for the tradeoffs, risks, disclosures, and caveats. If you’re ok with those, a $10,000 investment might net at a minimum, a few extra hundred dollars above what you’re earning in a high-yield savings or money market account until May 1, 2022, from bonds backed by the US.

Doubling Up in December/January

As described further in the article, individuals are limited to $10,000 in electronic I-bond purchases per calendar year. Therefore, you could max out your limit by December 31, 2021, then do it again on January 2, 2022, for a total investment of $20,000 per person.

Doubling Up Or More By Household Members

The limit is per person. So two family members could each purchase $10,000 in separate Treasury Direct accounts. The same goes for children. Read the Kitces article for examples of calculating this using jointly-owned accounts and naming “primary owners.”

Buying Additional Paper I-Bonds

Another $5,000 in paper I-bonds on top of the $10,000 annual limit on electronic I-bonds can be purchased via an income tax refund. To take advantage of this, if you have paid in or withheld taxes for 2021 exactly equalling what you will owe, then you could send in a $5,000 estimated payment for January 15. The $5,000 will be calculated as a refund when you file your 2021 taxes. Instead of a refund, you can use the $5,000 to have paper I-bonds sent to you. Then you can convert them to electronic bonds. Bear in mind that, by this time, the 7.12% annualized rate will be about to change on May 1. So this may or may not be worth the effort.

Holding Periods for I-Bonds

You cannot sell (called “redeeming”) the I-bonds for the first 12 months after purchase. So in a worst case scenario, you will earn the annualized rate only until May 1, 2022, inflation goes away, and the rate drops to 0%. You would earn no interest for the rest of 2022 (or 12 months since your purchase) until you could redeem the bonds.

If you redeem the I-bonds between the 1st and 5th year after purchase, you lose the last 3 months of interest. (So if the worst case scenario above occurs, you would lose 0 interest because the rate was 0%).

After the 5th year there is no cost of redemption.

Short-Term Pain for Short-Term Gain

When you add up what you could gain over the next 12 months by holding I-bonds and compare to the effort involved to purchase the I-bonds, the short-term pain may not be worth the gain. But for those who enjoy an opportunity to make a few hundred extra dollars, it just might be.

Continue ReadingEyes On I-Bonds

What’s a Holiday Spending Style?

what's a holiday spending style

What’s a holiday spending style? It’s the approach you take to spending money on others.

How do you decide what to spend at the holidays, and on whom? In her program, Money Habitudes http://www.moneyhabitudes.com, Dr. Syble Solomon breaks down our money habits and attitudes into several different styles. Here are how a few of those styles might apply to holiday spending.

Spending Style: Status

After earning my first real money at 15, I made a list and a budget for each person on it. A few years later, at age 20, I looked at the list of names, each with a dollar sign beside them, and thought “Yikes!” It could appear as if each person had a price tag.

At the time, I didn’t know it, but I was operating under one of Dr. Solomon’s six spending styles, the one involving “status.” In other words, I was too concerned what other people would think about my spending decisions, and as a result, I spent too much.

So next,  I made a “total” budget, and tried to keep track as I went along on how I was doing. Yet that didn’t work very well, since I could always find an excuse to break the budget on something to keep it “fair.”

Spending Style: Security

If you spend very little on others, and on yourself, because you are concerned you may need it for an emergency, you might have the “security” spending style. You might do the bare minimum necessary to get invited back to next year’s turkey dinner. Or you might find ways to celebrate other than spending money.

Spending Style: Idealist

Idealist – If you reject the materialism of the holidays, then you might give everyone something home-made, like cookies, or your own artistic creation. You have the hardest time of all styles making a spending plan, because you despise handling money matters.

Spending Style: Spontaneous

This style can’t wait to see what great ideas are presented each year by retailers. Perhaps you make a spending plan, but you have a tough time sticking to it because of all the fun temptations and opportunities to purchase the perfect gifts presented to you right before checking out.

Spending Style: Caretaker

Caretakers see gift-giving as a way to show how much you care about people. Your spending plan might be more generous than other spending styles (but hopefully not more generous than is financially wise).

Spending Style: Goal-Oriented

Your most important concern is staying within your spending plan. It may take you longer to get your shopping done in order to find the right gift-cost combinations.

What’s Your Style?

If you exhibit more than one holiday spending style, that is a good thing. The key is not to take any one style to an extreme. If you can make a spending plan that is wise for your situation, shows your love and affection for others, and still allows for some guilt-free spontaneity, you have probably found the combination that will bring you, and those you care about, lots of joy this holiday season.

For more on the psychology of money, see The Mindful Money Mentality: How to Find Balance in Your Financial Future.

Or to schedule a call to talk about money matters on your mind, click here.

Continue ReadingWhat’s a Holiday Spending Style?