The Simple Dollar

People walk in front of the New York Stock Exchange, in New York. It is extremely unlikely that the person offering to sell you financial tips actually is selling you anything that will give you any sort of advantage, let alone a lasting one, Hamm writes. (Seth Wenig/AP/File)

The problem with stock market advice

By Trent Hamm, Guest blogger / 03.12.13

Let’s say, hypothetically, that I figured out some ingenious way to predict the stock market so well that I would always significantly beat the annual returns of the S&P 500. Every year, year in and year out, I could get a 30% to 50% return in the stock market.

Assuming I’m not so altruistic as to just give away that knowledge, what would I do with it?

Logically, I’d use it to secure my family’s wealth. Then, if I could demonstrate the results to others, I might privately start a hedge fund or something to make more money from my newfound talent. I could make far more money doing these two things than pretty much anything else I might come up with.

One might argue that I could make a lot of money writing a book outlining my methods. Sure, that might work, and I’d probably sell a bunch of copies of that book. After the secret was out, though, everyone on Wall Street would begin using my “secret” and I’d no longer have an edge of any kind.  ( Continue… )

Commuters exit a train at Grand Central Terminal, in New York. You can save thousands of dollars each year by finding a home that minimizes your commute and transportation costs, Hamm writes. (Chip East/Reuters/File)

Looking to buy a house? Don't forget transportation costs.

By Trent Hamm, Guest blogger / 03.11.13

When Sarah and I first moved into the home that we currently live in, it made sense in a number of ways for us.

Our jobs were in two different towns about forty minutes apart, so it seemed to make sense to live in a place that was halfway between the two so that neither one of us had a long commute.

In terms of our money, this was a horrendous decision.

For starters, it meant that we had to continuously maintain two vehicles. Every morning, when we went outside, we needed two vehicles to start. We had to maintain insurance on both vehicles as well.  ( Continue… )

Stocking a shelf full of things you want to get done – books to read, games to play, or instruments to learn – will help you avoid the temptation to buy something for personal entertainment. (Ann Hermes/Staff/File)

Creating a 'to do' shelf

By Trent Hamm, Guest blogger / 03.10.13

Recently, I stripped all of the books off of my bookshelf in our bedroom. My wife and I each have a bookshelf in there, stuffed with books and other miscellany. Many of the books I’ve already read wound up in a box headed to goodwill, with the handful of absolute “must-keeps” and the unread ones set aside for the moment.

Once I’d done that, I spent the next few hours filling the shelf with things left undone.

I put a couple boxes of stationery cards on there. I put several books I’ve always wanted to read on there, along with my Kindle. I put a box of my home electronics gear on there, along with my miniatures paints and brushes and a couple of books on learning acoustic guitar and the harmonica. I put a book on garden planning on there, as well as a few of my favorite solitaire board games. I put a little box of video games on there, too, and many other little things.

The reason for making this shelf is so that whenever I’m tempted to buy something for personal entertainment, I know that I can just go look at that one place for something to do and I’m almost instantly overloaded with options.

Did I really need a physical place for this? Actually, I did.

So often, when I’d think of buying something new for my hobbies or my personal entertainment, I won’t necessarily be reminded of all of the things I already have available to me already. I might think of two or three things, but if those things aren’t immediately exciting me, it’s easy to just blow past that and buy something new.

Instead, now I have one place for a lot of my hobbies.

Even more important, the shelves are situated in a place where I see them every morning and every evening. They become a constant reminder of all of the unfinished projects that I have going on.

The more I see the shelves, the more all of those projects slowly burrow their way deep into my mind, so that when the moment comes where I’m thinking about buying something else, I have many, many more items that pop up in my thought stream telling me that I really don’t need anything else.

A final touch: whenever I’m in one of those “what shall I do today?” moods, all I have to do is walk over to that shelf and there’s a multitude of great ideas that cost me nothing at all.

It’s pretty straightforward to set up a “hobby shelf” like this. Just find a bookshelf in your home, preferably one that your eyes visit on a regular basis, and just fill it with little pieces of each of your hobbies. You don’t have to have all of your knitting supplies there, for example – just enough so that you can get started.

I really enjoy giving my own shelf a nice long glance. It just gets me excited and raring to go for the day, because I want to get all of my tasks done so I can have some time to tackle one of these interests.

Best part? It doesn’t cost an extra penny. It’s all stuff I already own, just waiting for me to put my own time and energy into it.

A waitress brings a cart of dim sum to a table of customers at Chatham Square Restaurant in the Chinatown neighborhood of New York. According to Hamm, a restaurant outing can be a great opportunity to teach kids about the economics of food and service. (Mark Lennihan/AP/File)

Teaching money lessons at a restaurant

By Trent Hamm, Guest blogger / 03.09.13

A few nights ago, our family went out to dinner at a local restaurant. On the occasions when our family does eat out, our children are usually pretty excited for the event, as it’s a change of pace from eating at home every evening. They’re usually really observant and spend much of the meal asking questions of all kinds and chattering like crazy.

What made this meal different? For the first time, our oldest son really began to notice the prices on the menus. He looked through the prices and connected them with his allowance, noting that even the children’s offerings were more expensive than what he received for his weekly stipend.

This screamed “teachable moment” to me, so we started talking about the costs of food.

The first thing we did was we started talking about what the cost of a meal in a restaurant actually covers. Of course, it covers the food you receive, but it also helps pay for the service (the people preparing it and bringing it to your table) and the building as well as (hopefully) a tiny bit of profit for the business owner. ( Continue… )

Aerialist Nik Wallenda walks the high wire 200 feet over US 41 in Sarasota, Fla., without a safety harness. Hamm recommends getting to at least $1,000 in cash in a savings account to serve as a financial safety net. (Mike Lang/Sarasota Herald-Tribune/AP/File)

How to build a financial safety net

By Trent Hamm, Guest blogger / 03.07.13

I tend to view life as being something like a high wire act at the circus.

We balance ourselves on that high wire and attempt to walk through life. We’re carrying a lot of weight to make the balancing act even trickier – children, marriage, and other responsibilities.

Eventually, something happens and we fall. Something interfered with our walk – a personal failing, a job loss, or something else entirely.

When we fall, there’s a safety net there to catch us. Some of us have family wealth or personally accumulated wealth. Others are surrounded by family and close friends for support. Still others have built up a long history of professional contacts. Skills and personal attributes also make up a part of that safety net.  ( Continue… )

A policeman directs traffic on a busy street in downtown Shanghai. Most auto insurance policies offer reductions in rate for customers who conform to certain behaviors, Hamm writes. (Carlos Barria/Reuters/File)

How to save money by keeping car insurance costs low

By Trent Hamm, Guest blogger / 03.06.13

There’s already a ton of great information from Jeff in The Simple Dollar’s guide about shopping around for auto insurance – how to choose it and how to optimize it.

Rather than just rehashing my own experiences with auto insurance, I wanted to look at it from a different angle. Obviously, my choices helped define what kind of auto insurance I chose, but how does auto insurance actually alter my choices once I already have it?

What do I mean by that? Most auto insurance policies offer reductions in rate for customers who conform to certain behaviors. In other words, if you do certain things, your insurance rate will go down.

For the auto insurance company, this makes sense. Insurance companies profile you. They look for aspects of people that are found in good drivers because good drivers are the ones who make money for the insurance company. If people are very rarely making claims, then the insurance company is going to clean up on you as a customer.  ( Continue… )

A woman counts her US dollar bills at a money changer in Jakarta, Indonesia. Very few people succeed at anything without being detail-oriented, Hamm writes, and the same applies to personal finances. (Beawiharta/Reuters/File)

The money is in the details

By Trent Hamm, Guest blogger / 03.05.13

Recently, I’ve come across several financial “gurus,” both in print and online, who make the claim that the little expenses in life don’t really matter in terms of getting ahead. “You’re wasting your time worrying about the details of lunch,” they say, “when you should be focusing on drastically increasing your income.”

It’s an appealing argument, one that particularly appeals to people with a strong do-it-yourself entrepreneurial spirit. Think big! Dream big!

Problem is, it doesn’t really work like that.

For starters, very few people succeed at anything without being detail-oriented. For all the talk about Steve Jobs being a visionary business leader, he actually succeeded because he focused on details, not just of his business, but of his life. He was constantly re-evaluating and editing even the littlest details of his life.  ( Continue… )

A passenger jet lifts off from Reagan National Airport in Washington. If you frequently indulge in expensive items, other parts of your life will suffer, Hamm writes. (Gary Cameron/Reuters/File)

How to save money when everything you enjoy is expensive

By Trent Hamm, Guest blogger / 03.04.13

A few weeks ago, I had a conversation with an old friend of mine. She was telling me all about her winter trip to Bolivia (I think that’s where it was, anyway) and seemed really passionate and excited about all of it.

After telling me, though, she paused for a bit and then said, “The problem with travel is that it’s so fun but when I come home it’s so depressing. There are so many bills…”

I suggested that there might be a connection between the travel and the bills.

“Of course,” she said, “but the things I enjoy doing are all expensive.”  ( Continue… )

Traders work on the floor of the New York Stock Exchange, March 1, 2013. According to Hamm, deciding whether or not to put money into volatile investments like the stock market and real estate comes down to your financial situation and temperament. (Brendan McDermid/Reuters/File)

Is the stock market right for you?

By Trent Hamm, Guest blogger / 03.03.13

Jane writes in:

I think you’re giving bad advice to people when you tell them not to put everything in stocks or real estate when making a long-term investment. Over a long period like ten years or more, you simply can’t beat the returns there.

Long-term investing relies on several assumptions, two of which hinge very strongly on personal luck and personal behavior.

One, you’re not going to touch that balance for a very long time. The chance that you’ll touch that balance in any way over the next decade (at least) is very, very small. If there is a crisis in your life, you have other assets you can use to deal with that situation without touching your long-term investment.

Two, you are completely comfortable watching the balance of your investment drop through the floor every once in a while. It’s easy to feel good about an investment when you see it earn a 15% return over the course of a year. It’s a lot harder to feel good about it when you see a 40% drop over the course of a year.

The first issue can be resolved to a large extent through solid personal finance management. Pay off your debts, maintain an emergency fund, and you’ll go a long way toward heading off most of the crises that would interfere with your long-term investing.

The second one, however, is a bit trickier to handle.

During 2008, I witnessed several people I know make panicked moves with regards to their retirement savings and their own personal investments. They yanked their money out of stocks in the latter days of 2008, locking in enormous losses, and put their money into other investments.

With hindsight, this looks like a terribly bad decision. 2009 and 2012 were both stellar years for the stock market and stocks have regained every bit of ground that they lost in those years.

The problem is that, in the moment, it’s very hard to see that type of rebound when you’re watching your life savings dwindle away. You also don’t necessarily know how you’re going to react in that moment.

My perspective is that the key to the matter is what I call a “hardening” of one’s needs. When you’re young and retirement is a very long way off, a big loss isn’t that big of a deal. I watched 2008 flow through my retirement accounts and it didn’t seem disastrous.

However, if I watched 2008 from the perspective of my parents or my in-laws, it’s a very different picture. It’s scary because it’s much more immediate. While they may have still been outside of that ten year timeframe, a big retirement loss is much more urgent because their lives are beginning to move toward retirement.

So, what I suggest is that if you’ve reached a point where you know what your target “number” is and you know roughly when you need to reach it, you need to start moving into safer investments, even if the horizon is more than ten years off. The “firmer” the target date and target number are, regardless of the time until you reach that point, the more you need to move into safer investments like bonds and cash.

What if you need those “big gains” to reach your number? If that’s the case, then you need to look at saving more or else putting off your target date a little bit.

If you have a target date in mind and you’re gearing up your life to retire in that timeframe, a big stock market or real estate swoon becomes incredibly scary. Once that timeframe becomes pretty clear in your life, you’re making other life plans according to that timeline, and you see things progressing clearly toward that investment endpoint, you need to start preparing for it, even if it’s more than ten years out.

Don’t ride the giant roller coaster if you’re not in the right position to handle the big drops.

Again, personal finance isn’t about pure dollars and sense. It’s about managing your emotions, and it’s also about putting things in the broader context of your life. Keep that in mind with every single move you make.