Britton Gregory

Another tragedy has struck.

At this point, someone reading this blog years hence would probably knit their brows and cynically wonder, “which one?” Whether because tragedies have randomly clustered around this particular time, or because of our society’s unprecedented access to news, or because (an ironically historically-popular theory) we are at the End of Days, there are a lot of tragedies to choose from. This one is different, though, because it involves two things that should never go together: guns and children.

In the days following, as I worked through my own horror and the underlying fear that gripped every parent, I was struck by the fact that now, as never before, we are able to watch an entire society go through the stages of grief. I’m referring here to Facebook, where the first few posts immediately following the incident spoke of numbness and shock…but were then followed by a flood of anger and outrage. (Soon after, the Onion posted an article that encapsulated the “depression” stage pretty succinctly, but I’m getting ahead of myself.) And riding on the crest of that anger came the Agendas:

“We need more gun control.”

“We need to arm more civilians.”

“We need to put God back in schools.”

Granted, there were a few who attempted to lead Facebook in prayer, but they were (in my corner of the Internet, at least) drowned out by the sea of demands. And for the most part, this is entirely natural and even reasonable — a terrible thing has happened, let’s take steps to make sure it doesn’t happen again. The problem here is this: generally speaking, we don’t make good decisions in the face of this kind of tragedy. Feeling the terrible injustice that has been done, even if it hasn’t touched us directly, we lash out; and when someone urges caution, tells us not to make decisions too quickly, says “it’s too soon”, we call them an unfeeling monster. “How can you stand there and say that? Don’t you see what happened? Isn’t it obvious what needs to be done?” Spurred on by heart-rending news photos, perhaps a few quickly-written songs aired on the radio, we hold on to that anger.

And that, too, is entirely natural, because at some level, the anger feels…good, doesn’t it? Like a sore muscle or bruise, we find ourselves somehow seeking out the pain. So we clutch it, and before it has a chance to fade, we act on it — and, almost inevitably, say or do something we regret.

But how do we avoid being “unfeeling monsters”? Well, this is what I’m going to do: grieve. Mourn. Make a space for the anger to be replaced by sadness, rather than immediately rushing out and doing. It’s hard — sadness doesn’t feel nearly as good as anger — but by allowing ourselves time and space to work through our grief, allowing ourselves to grow, we are able to come together afterwards, all of us with our agendas, from a place of compassion and wisdom.

And maybe, just maybe, take a step forward.

There’s a saying that the rector at my church is fond of when referring to the Bible: “All stories are true; some of them actually happened.” As far as referring to the ain’t-necessarily-so aspect of Scripture, I’m all for that. However, when taken in a wider context, I disagree: there are stories that are radically untrue. From my way of looking at things, all stories can’t be true, because for every story, there is an anti-story.

For instance: there’s story of the Prodigal Son, where the wastrel  returns home to his family to be welcomed with open arms. That’s Mercy and Grace, in a nutshell. But there’s an anti-story: the Grasshopper and the Ants, where the grasshopper plays all summer while the ants work hard and save up for the winter, and when winter comes, the ants leave him out in the cold to die of starvation. That’s Justice. They can’t both be true…at least, not at the same time and at the same level. True, the Prodigal does experience his Grasshopper moment while pining for even the scraps fed to the pigs, but in the end — in the wider, broader story — he is redeemed.

More importantly, our belief as to which story is true will determine how we live. Do we believe in Mercy, that those who have squandered the richness of their lives deserve a second — and third, and seventh, and seventy-seventh — chance? Or do we believe in Justice, that everyone must earn their reward? Or, as is often the case, do we believe in one story for ourselves and another for others? Do we believe in justice for ourselves and mercy for others, which generally comes out as “in their case, they deserve what they get, but in my case, it wasn’t my fault”? Or perhaps even the reverse, where we hold ourselves to an impossibly, soul-crushingly high standard that would seem ridiculous if we imposed it on someone else?

So when you hear a story, ask yourself: what’s the anti-story? And which do I believe?

Warning: if you’re not a gaming geek, the following post will be relatively meaningless. Feel free to skip it; I won’t be offended. It’s not world-shattering, but I had to get it out there nonetheless.

I find myself experiencing a severe case of child-before-Christmas syndrome with respect to Star Wars: The Old Republic’s imminent release. As I pre-ordered the day that pre-orders were available, I fully expect to be in tomorrow’s wave of early releases; as such, I suspect I will find it difficult to sleep tonight. But why?

Well, I’m a fan of MMO’s, it’s true. Despite not really having the attention span to get far into, say, high-level raiding, there’s something about the idea that grabs hold of me. I occasionally subscribe to EVE for a couple months, just to get my spaceship/everyone-on-the-same-server/crazy-player-economy fix. 

And it’s true that I love Star Wars. It’s in my top three IP’s, next to Middle-Earth and Narnia — and it’s the only one with laser swords. But again, I don’t have the commitment to, say, watch the old trilogy back-to-back (I tried once, before Phantom Menace came out, and ended up sleeping through Dagobah). 

Star Wars: The Old Republic is personal, though. It was made in Austin. 

So when the server didn’t boot me once, even during Beta Weekends, I figured I had Evan and his team to thank. Evan spent a semester walking me and the rest of his class through the basics of game programming, and sharing his love of artful Japanese games like Shadow of the Colossus.

When a piece of concept art made me swoon, I checked to see if my friend Paul had done it. He and I played D&D together in ages past, and would occasionally doodle out our interactions with crafty kobolds and whatnot. 

When I first met the Sith Inquisitor’s master, Darth Zash, I cackled gleefully at her wonderfully unique personality and voice. I immediately sent a facebook message to her writer, Rebecca, a friend of mine from church.

Every time I come across an interesting feature, like companion crafting or variable-rate energy recharge, I wonder whether Damion has been waiting since Shadowbane to implement it. I got the chance to interact with him and the others at Wolfpack back in Shadowbane’s glory days, and I’m sure there were a lot of lessons learned that they were just itching to apply to their next MMO. (For me, I still think that game had some of the best original IP ever.)

And of course as I revel in the overall story, I think of Daniel Erickson, and the semester he spent teaching me — and the few of my classmates to survive his scathing criticism — how to suck a little bit less at writing.

So for the first time, I’m personally invested in how well a game does. No, I didn’t buy the Collector’s Edition — but I am buying several months of game time for both my dad and my wife.

A friend of mine once remarked, “You know the best way to get rich? Don’t have kids.” My first reaction was to ruefully admit that this was true; children are a very expensive commitment, and a very long-term one at that.

However, as I found myself thinking about that statement much later, something about it just seemed to ring false. I slowly began to realize that the problem I had was with the definition of the word “rich”. “Rich” certainly is generally used to indicate an abundance of material wealth; however, money is not an end to itself. Rather, it’s a means to an end; it’s a resource that allows you to pursue other ends.

And “rich” can be used in another context; that is, the idea of a “rich life”. When people use that phrase, they’re generally referring to a life lived to its utmost. In this sense, “rich” doesn’t imply wealth at all, except insofar as it’s necessary to achieve that end.

It reminds me of a conversation I once had with the rector at my church, when I was trying to figure out what I wanted to do with my life. At one point, I mused, “I want my life to be an adventure.” His response was to ask a question: “What would life as an adventure look like?”

After thinking about this for a while, I came up with a picture that works for me:

• An adventure has a goal, a quest, something that is driving the heroes forward. Generally, the heroes undertake the quest in service to a higher purpose, not merely for their own enrichment.
• An adventure has many detours on the way to that quest, opportunities to witness beauty and desolation. The heroes should not be so focused on their goal that they miss these opportunities.
• The heroes face grave trials along the way, ones they would not have faced had they stayed at home.
• The heroes also experience great joy, again much more so than had they not undertaken their quest.
• The heroes grow, physically and spiritually, along the journey.

Many years later, I look back on my years as a parent, and I see that it truly is a grand adventure. It’s not comfortable, and in fact requires a great deal of sacrifice…but in the end, I wouldn’t trade it for anything. Being a parent — if you truly embrace it as your life’s adventure — is as rich a life as I could ask for.

From George MacDonald’s “Diary of an Old Soul”:

“‘Tis hard for man to rouse his spirit up —
It is the human creative agony,
Though but to hold the heart an empty cup,
Or tighten on the team a rigid rein.
Many will rather lie among the slain
Than creep through narrow ways the light to gain —
Than wake the will, and be born bitterly.”

Being translated: wake up. 

I had completely forgotten the magic of reading until the light bulb went on for my son Peter. For him, it’s as if a whole new world has come into focus; what once were meaningless symbols on doors, signs, books, computers, gadgets, toys, magazines, games, TV, food wrappers, clocks, billboards — so many things — are now becoming meaningful. It’s thrilling, and the excitement creates a positive feedback loop that has accelerated the process even further.

I wonder what new sorcery he’s going to discover next…

I’ve been thinking a lot about personal change lately, and whaddya know? It’s New Year’s, when the idea of personal change comes to the fore. So while we’re in that frame of mind, a few thoughts gleaned the many, many mistakes during my time here:

• Focus is key. Listing ten resolutions is a sure-fire way of getting discouraged and giving up on any of them. I like the idea of one fault, one correction, but I’ve heard of people who set three so that even if they fail at one or two, they’ve got at least one success to boost morale.
• Huge, willpower-driven changes are, for most of us, unsustainable. Sure, you can go from no exercise to two hours a day overnight, but how long until you burn out? Taking one small step at a time (starting with a 15-minute walk three times a week, for example) is both more sustainable and more motivating. Success — even minor success! — sets up a positive feedback loop.
• In fact, it’s generally best to take willpower out of the equation as much as possible. Set up a system. Get an exercise buddy. Publicly announce your goals and have your friends help keep you accountable. Set up automatic reminders via e-mail or SMS. Use a stick like, well, stickk to keep you from faltering. As much as possible, automate, automate, automate. 
• Mark future dates in your calendar to review your progress and change course. Things will go wrong — you will make mistakes. Accept that they’re going to happen, figure out what’s going wrong, and try something different. Whatever you do, don’t just “try harder”; try something different. It’s said that the definition of insanity is trying the same thing over and over and expecting different results; this is especially true in the realm of personal change.

Change is hard; the animal part of us just isn’t equipped for it. Luckily, we have brains, and we have each other, and change is worthwhile. 

So: let’s get to it. See you in 2011.

There’s a prevalent idea in the personal finance world: “if you don’t start investing now, you’ll never catch up.” I recently encountered this idea in a slightly different context than I’m used to, and the more I thought about it, the more I realized how misleading it can be.

First off, an introduction. “You’ll never catch up” is an idea that stems from the power of compound interest. The classic example is that of Early Edna and Late Lucy (substitute whatever cutesy names you desire): Early Edna invests for ten years immediately upon receiving her first income, then stops and never puts in another dime. Late Lucy, however, doesn’t start until Early Edna is finished, but she invests for another 30 years. At the end of that 40-year span, if the rate of return on their investments is high enough, Edna still beats out Lucy. Check out the table here if you like hard numbers.

So the point here, of course, is to start investing as soon as possible. I agree with this 100%, and wish I’d seen it when I graduated from college (or that I’d listened to my parents). But then I encountered that idea in the context of investing vs. paying off debt, and it gave me pause. It ran something like, “Of course you should invest at least something, rather than using all of your available income to pay off debt — otherwise, you’ll never catch up. An investment compounds forever, but eventually, you’ll pay off the debt.” In other words, there was a qualitative difference between investing and paying off debt.

I was torn. On the one hand, intuitively I saw where the idea was coming from. But on the other, I had learned enough to know that, as far as the math is concerned, investing and paying off debt have exactly the same effect on one’s long term net worth. You even use the same spreadsheet function (FV, “future value”) to do the calculations — just with a sign or two reversed.

I also began to see the intuitive counterargument: debt also compounds forever, or at least it would if you didn’t make any payments on it.

So to be absolutely sure, I drew up a spreadsheet (I love spreadsheets) and played around with several scenarios. Sure enough, if the interest rate on your debt and the rate of return on your investment is the same, then it doesn’t matter a whit where you put your money — your net worth is the same at the end.

Of course, that’s a big “if” — the your interest rate and investment returns will almost certainly be widely disparate. Also, paying off debt is risk-free, whereas most investments tend to swing in value over time. Also also, being debt-free has psychological worth to many people that’s far beyond the dollar value. 

So really, that last paragraph is the takeaway. If you’re a numbers person, treat paying off your debt as a risk-free investment with a rate of return equal to the interest rate. If your rate is fairly high, you’ll find that paying it off is a fantastic investment, and that it’s worthwhile to get rid of that debt before putting a penny towards investments. If it’s fairly low, perhaps you’ll want to split between the two, and if it’s extremely low, I don’t think anyone would blame you for paying the minimum and putting the rest of your money into investments. Of course, what “high” and “low” mean are up to you. If the mere idea of being out of debt has worth to you, then the bar for putting money towards your debt is set lower than it would be otherwise.

Just don’t let anyone tell you “you’ll never catch up” if they don’t know your situation. 

To the fine people at Discover Card:

I like the idea of having 5% cash back on rotating categories. Very cool. It has the potential for making me occasionally pull out my Discover instead of AmEx Blue Cash. I mean, I’m pretty enamored of the fact that the AmEx gives me 5% back on groceries, gas, and drugstore purchases all the time and 1.5% back on everything else, but I’d be willing to use the Discover to pay for clothes, restaurants, etc. if you gave me 5% back on them now and then.

But wait, what’s this fine print? “Subject to a cap of $300 in purchases.” Wait, for the entire rotation time (3 months)? Yes, for the entire three months. OK, so you’re saying if I use your card instead of my other one, I’ll get at most a whopping $10.50 (5%-1.5%) over what I’d get with the AmEx (which, incidentally, has no such cap)? $3.50 per month?

Really?

That’s pretty underhanded, Discover. I mean, I like you — you were the first credit card I had heard of to offer cash back for purchases, and I loved that (and still do). But this? This kind of trickery is no way to keep your customers’ hearts — or our wallets.

Public service announcement: in your young child’s eyes, nothing is more awesome than one-on-one time with you. Video games are pretty fun. TV is OK. But watch how their eyes light up when you say, “Wanna play Transformers (or legos or house or…) together?” 

Every now and then, give them your undivided attention. They crave it, like a man in the desert craves water. 

This has been a public service announcement.

You’ve got a shiny diploma, thousands of dollars in student loan debt, and a dozen friends and relatives who each have their own idea about where your money should go. Buy a house! Pay off that student loan! Save for an emergency fund! Invest in your 401(k)! And, somehow, have money left over for, you know, food and stuff!

Fear not: I’ve got a system that can help.

Start off by putting a minimal amount towards every savings goal you have. You heard me: all of them. And when I say “minimal”, I mean it — even if it’s only 0.5% of your  paycheck into your 401(k), the minimum payment on your credit cards, and $20/month for your emergency savings fund, put something away towards each of your goals. The idea here is that you start saving right now, thus taking advantage of the mysterious force of compound interest that makes for interesting graphs like this (from this post). (And yes, compound interest has the same effect whether you’re talking about debt or saving.)

Of course, even compound interest isn’t magic enough to fund your retirement on 0.5% of your paycheck. Which is why the next steps are critical:

Every six months, increase the amount you’re putting away by a set amount. It doesn’t have to be a lot, but by periodically increasing the amount  you put away, you can slowly ramp up to your goal in small, painless increments. The money that would normally go to “lifestyle inflation” will instead go quietly, steadily towards your savings goals.

For instance, you might add 0.5% to the amount of your paycheck going towards your 401(k) every six months. In ten years, you’ll be putting an extra 10% away towards retirement, something a lot of people in their 50′s can’t say!

Meanwhile, choose your Most Important Goal and focus on that. All your savings goals are getting some attention; pick the most important one and give it some extra love. Allocate more of your budget to it; put a high percentage of all “found money” there (the rest you can spend on whatever you want, as an incentive to “find” more); in general, make it a high priority. Once that goal is taken care of, move on to another, and so on. This way, while you’re slowly building momentum on your other goals, you’re always focusing on the most important one. A suggested priority list for a new grad:

1. One-month buffer
2. High-interest debt, in order of size (snowball) or interest rate, whichever motivates you more
3. Emergency fund (3-6 months’ basic living expenses or more, depending on your situation)
4. Mid-sized savings goals, like your next car or the down payment on a house
5. Low-interest debt
6. Retirement

By the time you’ve worked your way down to “low-interest debt”, you should be in really good shape. Will it take a while? You bet. That’s the beauty of long-term goals, though — you have a long time to get them right!

So you’re bound and determined to add commodities to your portfolio, and for all the right reasons. Great! There are a few ways to do it…though I would only strongly recommend one.

Buy the commodities themselves. Stocks and bonds are quite liquid, since they’re essentially notes saying “you own X” or “we owe you X”. Commodities, much less so. Sure, you can buy gold coins, but to buy enough that they’re a substantial part of your portfolio — not to mention diversifying into other commodities such as timber — would get prohibitive very, very quickly.

Buy GLD. Purchasing a share of the SPDR Gold Trust ETF (“GLD”) entitles you to ownership of a piece of the gold held by the trust in reserve. You could even redeem a “basket” (100,000 shares) for the equivalent in gold, if you so desired. This is much more liquid than buying gold bars themselves, but in buying gold you’re holding a concentrated position in one particular commodity — one which has historically shown itself to be among the most volatile!

Buy precious metals equities. That is, buy stock in mining companies. This isn’t a terrible idea, as precious metals equities tend to be relatively uncorrelated to other equities and positively correlated with inflation, both of which are good for hedging, and you can buy a low-cost, diversified bucket of them via Vanguard’s VGPMX fund. However, like GLD, VGPMX is highly volatile, and its returns have not had nearly the sharp upward trend that GLD has had over the past decade.

Buy a collateralized commodity futures (CCF) fund. This sounds a little complicated, and it is — a little. A CCF doesn’t buy commodities, but rather it buys futures – contracts to buy commodities at a future date at a certain price. Moreover, the cost of buying the contract is a small fraction of the cost of the commodities themselves; the rest of the collateral can be invested in a high-quality investment like treasury bills or TIPS, which earns interest during the time of the contract. (Of course, the fund never actually buys the commodity, but rather keeps rolling the futures forward indefinitely.) What this means is that by investing in a fund like PIMCO CommodityRealReturn, you can double-hedge against inflation — once by the price of commodities, and again by the TIPS used as collateral. PCRIX is well-diversified and has a not-terrible expense ratio, to boot. You’re still not going to earn much more than inflation in the long run, but a dollop of this in your portfolio can reduce inflation-related volatility without sacrificing too much in the way of returns.

As you’ve guessed, I can really only recommend CCF’s, and even then only if you’re committed to investing in commodities. It may be comforting to invest in something that is “real”, but just because something is tangible doesn’t mean that its value doesn’t fluctuate as much — or even more — than something that is intangible! (And if you want to invest in something that’s exciting…well, I can only hope that you’re limiting your gambling addiction to a small fraction of your portfolio.)

A couple years ago I wrote a cautionary post in the wake of the run-up on gold over the past decade. Since then, gold has…well, not gone really anywhere, and neither have commodities in general. So I figure now is a good time to talk about investing in commodities, when people aren’t jumping up and down about how they’re going through the roof (or the floor).

Don’t speculate on commodities. Well, I don’t recommend speculating on investments, ever, but it’s especially true for commodities. You think the stock market is a roller-coaster ride? Commodities will make you lose your lunch! Remember back in 2008-2009, when the S&P 500 got cut in half? GSG, an ETF that tracks the S&P Goldman Sachs Commodity Index, plummeted by two-thirds, and it’s hovering at around half of its 2008 high even today. Yes, the runup on gold since 2000 is drool-inducing, but so were internet stocks before 2000 and real estate before 2008. Don’t become yet another cautionary tale.

Don’t look to commodities to boost your returns. “OK, fine — I’m investing in commodities for the long term. They’ll make me rich!” No, they won’t. By definition, commodities are items that can be replaced. Any time any given commodity gets too expensive, corporations start figuring out how to do without it — witness the explosion in hybrid technology when oil prices were shooting up a few years ago, or the move to copper wiring by companies that traditionally use gold. No, over the long term commodities barely keep up with inflation — no surprise, since the price of commodities is pretty much the definition of inflation. (Gold has historically been no exception…which should make current holders of the shiny stuff very cautious when looking at charts like this.)

Don’t invest in commodities as your primary hedge against inflation. Afraid of inflation? Invest in Treasury Inflation-Protected Securities! While they have normal interest just like any other bond, their principal is adjusted for inflation, which makes TIPS a safe, low-volatility way to guard against inflation. (By design, their yield is exactly their inflation-adjusted return!) While commodities track inflation over the long term, they may go for years before reverting to the mean; in mathematical terms, they have a positive but lower correlation with inflation than TIPS.

Do invest in commodities to reduce your overall portfolio volatility. Commodities are very interesting in that they don’t often move in tandem with either stocks or bonds. This means that, with regular rebalancing, a canny investor can take advantage of commodities to smooth out their portfolio, selling commodities when they are high to buy stocks and/or bonds, and vice-versa, with the overall effect of reducing volatility. Now, note that I said “don’t often move in tandem”; in 2008, they crashed along with nearly everything else, so don’t look to commodities to work miracles. That’s the job of short-term treasuries!

So yes, commodities can be a useful part of your portfolio, if bought for the right reasons. Next stop — how (and how not) to invest in them!

Arguably some of the most important work I do with clients is integrating their financial and spiritual lives — e.g., how does what you do with your money reflect your beliefs about The World and your place in it? Sometimes, a client says one thing, but their money says another, and I have to gently point out where the two differ. However, what can be more troublesome is when a client’s finances follow their theology completely…straight down a black hole of credit card debt. This is most often the case with the Theology of Abundance.

The Theology of Abundance is a fairly straightforward aspect of the Christian faith in particular; it says that you shouldn’t hoard your resources out of fear, but that you should give freely as God has given to you. The example of Jesus feeding the five thousand with only a few loaves and fishes is given as a prime example. And it’s a great theology; that kind of faith frees you to let go of your money, which in turn releases your money’s hold on you.

You can probably see where such a theology might lead you into trouble: “I shouldn’t worry about my finances, so budgeting is, in fact, something to be avoided. I give to the church, and my family, and my friends, and those I meet on the street…and occasionally buy myself nice things. God will provide, right?” And then the credit card bills come in, and that’s amended to, “God will provide eventually, right?” Despite faithfully following Jesus’ example with the loaves and fishes, there’s a twinge of guilt, and a nagging feeling: does the Theology of Abundance actually work in the real world? But of course that would question your faith, so you shove that nagging feeling down and continue to (faithfully!) ignore your finances. And the debt piles up, until you barely have the cash flow to pay your normal bills, much less help anyone else out.

So, does this mean that the Theology of Abundance is wrong? As it turns out, no. There’s a crucial point here that people overlook when applying the loaves and fishes to modern-day life: Jesus didn’t ask the disciples to give what they didn’t have. He didn’t say, “go get a loan of a few hundred denarii, and feed these people”; he asked, “What do you have?” And he was able to work a miracle with that. The trouble is that with the advent of credit cards, it is ridiculously easy to spend what we don’t have, and there’s where we get into trouble. If you want Bible quotes, here’s one from Proverbs that Dave Ramsey loves to throw around: “the borrower is slave to the lender.” He’s not wrong, either; how can you live your life faithfully as a servant of God when you’re already a servant of your creditors?

If you truly believe in abundance, then the only reason you should be carrying credit cards is for convenience. If they’re a temptation to live beyond your means, throw them away and start using the envelope method — it’s actually more fun than you might think! Once you start giving out of what you have, and not what your credit card company has — once you allow God to work with your small handful of loaves and fishes – then you’ll start seeing the real miracles happen.

“Financial success doesn’t happen overnight, but is the product of years of work.” That kind of pithy saying is obvious almost to the point of being painful, so why point it out? Well, I wouldn’t bother, except for the fact that most people don’t actually act on it; they don’t seem to know what thinking in the long term actually means. So let’s get into specifics, shall we?

Spending trends are more important than events. Did you spend more than you earned in November? Who cares? What matters is, are you spending more than you earn over time? One month isn’t going to make or break you; what matters is the long-term trend. Does your spending go up faster than your income? When you get a raise, does it immediately go to improving your lifestyle — or do you set aside some of that raise to pay off your debt faster or bump up your monthly 401(k) contribution? Do you have a plan to not only to save a certain amount, but to increase that amount year after year?

This is one of the reasons why a buffer should be your very first savings goal. When you’re no longer swamped with the day-to-day stress of wondering whether you can pay the bills, you can spend more time looking at the trends — both external (like the price of gas) and internal (like how much you decide to put aside each month).

“Always in motion is the future.” Ten years is a long time from now — so why base your plan on a bunch of assumptions about where you’re going to be? Instead, you need to make flexibility a priority, which in turn means building up discretionary income by resisting lifestyle inflation, paying down your debts, and saving up for new purchases, rather than taking on new debt. The more discretionary spending you have available, the better you’ll be able to handle whatever life throws at you.

Your investment plan can’t be based on occasional luck. So you (or your financial planner) predicted the latest crash and pulled all your assets out of stocks just in time, or invested in Apple stock when it was at 200, or made a killing selling covered calls while the market was going nowhere. That’s great, but…that’s not what’s really important. What’s really important is whether you (or they) perform well consistently, year in and year out, for decades. The flip side is also true: don’t be too quick to dump a strategy or planner for underperformance, either. A conservative portfolio looked like foolishness in 1999…and sheer genius in 2001.

See what I mean? The long-term view means ignoring events in isolation, and looking at patterns and systems instead. Not why you spent $300 on electronics last month, but how you’re controlling your spending over the year; not how you’re going to pay your recently-raised rent, but what your plan is for maximizing your discretionary spending; not what the market’s doing this week, but what it’s doing this century.

And if that kind of systematic planning just isn’t your thing, well, that’s what geeks are for.

Many of us born after a certain year have had “self-esteem” drilled into us since we were children. “Good job!” is still ringing in our ears after the innumerable times it was said to us — to the point where the words have almost  become meaningless. And why not? Confidence seems to be the underpinning of almost every form of success, even more so than intellectual ability, and the best way to build confidence in someone is to continually tell them how awesome they are, right?

Wrong.

Per the book by Dr. Kristin Neff of our very own University of Texas, this is more like “stuffing ourselves with candy.” We get a brief “high” of increased self-worth…which then crashes in despair when reality tells us something different. We try to pump ourselves back up by more “positive self-talk”, ignoring our faults and placing the blame for failures on something (anything!) outside of our responsibility…which sets up a continual high/crash cycle that ultimately goes nowhere. After all, how can we improve — really improve – if we refuse to learn from our mistakes?

This affects every aspect of life — including finances. Full of confidence in our ability to stick to a budget, we get aggressive in cutting back on perceived luxuries like new clothes or electronics; the next month, we stare in horror at our five-hundred-dollar Nordstrom or Fry’s bill, and give up budgeting entirely in despair. Full of confidence in our ability to time the market, we load up on “sure-fire winners”; then the bubble pops, and in the ensuing financial and emotional crash we pull our money out of the market entirely. It happens everywhere, all the time; self-esteem not only blinds us, it hobbles us and keeps us from growing.

The alternative? Self-compassion.

Self-compassion goes by several names, like humility or perhaps intellectual honesty, but it is, in its basic essence, deciding not to judge yourself. This does not mean refusing to evaluate your performance in any given area; rather, this means separating that performance from your worth as a human being. It means allowing yourself to make mistakes, with the knowledge that we grow by making those mistakes and allowing ourselves to embrace and learn from them. By acknowledging that we can and will make those mistakes, we can better deal with the consequences.

Of course, this applies to finances as well. When making a budget, we might set more realistic spending limits, or create an “oops” category for mistakes, or set aside a regular time to adjust next month’s budget based on last month’s spending. When designing a financial plan, we might be more willing to seek outside help and opinions, more able to take the right amount of risk, and less likely to panic and “sell everything” in the face of the unexpected.

So, great; how do we do that? The first step, of course, is in acknowledging that self-compassion is a valid choice — perhaps the hardest step for many of us, with our artificially-inflated egos that are more afraid of giving up that false self-esteem than we are of the inevitable real damage that it causes. But by taking this step, we are allowing ourselves to take the next: to surround ourselves with compassionate people. By choosing friends and advisors that judge our actions without judging our character, that compassionately tell us what we need to hear rather than what our egos want to hear, we are setting ourselves up for real growth.

And the more often we hear truth delivered with compassion, the more our self-compassion will grow, our egos shrink, and our lives improve.

Though the financial media buzz has faded somewhat in recent years, ETF’s (exchange-traded funds) exploded in popularity in the mid-2000′s as an alternative to index funds. What are they, and should you invest in them?

An exchange-traded fund is exactly what it says: a fund (mix of securities) that sells on a stock exchange. A regular mutual fund has its price re-computed at the end of the day by looking at the value of all of the securities that are in it; shares of an ETF, on the other hand, are actually bought and sold themselves. This seemingly small change can make all the difference in the world:

• ETF’s often (but not always) have lower expense ratios than their corresponding indexes. Why? Because a mutual fund firm has to deal with a lot of paperwork when mutual funds are bought and sold, because they are the ones that have to process it. Not so with an ETF; since they’re sold on a stock exchange, the brokers do all the work there. (The ETF has some work to do — I’ve sidestepped the whole issue of how the price is maintained — but it’s comparatively small peanuts.) This alone can be a good reason to invest in ETF’s, as expense ratios are just about the only way to differentiate between funds that follow the same index, but that advantage comes with several less-obvious disadvantages:
• ETF’s often (but not always) have commissions. Since you have to buy and sell ETF’s through a brokerage like Schwab or Fidelity, they’ll often charge you a commission to make the trade. If you’re putting a part of your paycheck into an IRA every month, this can quickly eat up any gains you may have gotten over an index fund (and then some!). However, many of the ETF’s most investors are interested in are offered commission-free by the broker; you just have to be careful what you buy. (Of course, mutual funds often have commissions, too.)
• ETF’s are very difficult to auto-invest. As of this writing, the only popular brokerage I know of that allows you to automatically invest in an ETF is ING’s Sharebuilder, which, while cheap at $4 per automatic investment, is not commission-free. The others only allow automatic investment for mutual funds. Of course, if your ETF has a commission, you probably won’t be automatically investing monthly anyway; likely, you’ll save up in a money market account every month, then invest in ETF’s once every three or four months, so you’re only charged the commission three or four times a year. Either way, it’s not as easy as mutual funds.
• ETF shares are generally more cumbersome to trade. With mutual funds, you just tell your mutual fund company how many dollars of your funds you want to buy, sell, or exchange (in the case of rebalancing), and the firm takes care of it all at the end of the day, no muss, no fuss. With ETF’s, if you’re rebalancing, you have to sell the shares from the too-high ETF, wait for everthing to clear, then buy the shares from the too-low ETF. And in the meantime, because you can only buy whole shares, you’ve got money piling up in your money market account, leftover from each trade. On the whole, annoying.
• ETF’s have a bid/ask spread. Because they’re traded on an exchange, there’s a small amount of “friction” involved in buying or selling an ETF, in the form of a bid/ask spread. The more you trade, the more the spread will eat into your returns. Mutual funds do not have this problem.

So, are all the disadvantages worth the lower expense? They can be; however, it’s worth it to sit down and plot out how much you would save in dollars per year if you moved from an index fund to an ETF, and make your decision based on that.

(One note: if you use Vanguard (and I highly recommend you do), there’s virtually no reason to use an ETF. Why? Because they recently lowered the minimum for purchasing Admiral Shares of many of their funds to $10,000, making them very accessible, and in just about every instance, the expense ratio for Admiral Shares is exactly that of the corresponding ETF!)

Got a preference? Tell us about it in the comments!

Getting a bargain is a great feeling, isn’t it? In fact, I know some people who flat out refuse to buy anything at retail price. (And that’s not a bad goal, as far as it goes.) But there’s a danger — I think the cartoon says it better than I ever could:

Madison Avenue knows how we think, doesn’t it? We’re so wrapped up in how much we’re saving, we forget how much we’re spending in the first place. And it’s not just retail: Discover  is fond of sending offers for e.g. $500 cash back if you spend $3000 on their card every month for six months. American Express Blue Cash used to have a little gauge on their site that would show you how close you were — and how much more you would need to spend! — in order to make your cash-back goal.

The worst part: sometimes we do it to ourselves with almost no encouragement. For example, we hate to pay taxes — so we hold on to risky stock from our employer until it becomes a qualifying disposition, or we refuse to sell a well-performing stock for fear of capital gains (or alternately sell a temporarily underperforming one to lock in capital losses!). Now, sometimes this is the wise choice…but all too often, we make the decision in favor of “less tax” without giving the matter enough thought.

Of course, it’s not that humans are stupid — it’s that cognitive bias can often turn us into our own worst enemy. So what’s a poor, irrational human to do? To start:

Last week, we talked about prescriptive and descriptive budgeting — “I Will” versus “It Is.” I did this because they’re useful concepts, but mostly, because I have a challenge for those I call “100% descriptives”.

First, though: descriptive budgeting can be a wonderful goal to strive for. For many people, financial success is defined as freedom — the ability to spend what they want, without worry. By working to increase discretionary income – in large part by paying off old debt and avoiding new debt — this can become a hard-won dream-come-true. And you’ll know that you got there when all of your nearly spending categories become descriptive — they are what they are, and you don’t need to cut back on them in order to meet your goals.

However, your budget should never be 100% descriptive. I have friends who are pretty much there, and some of them can’t stand the idea of budgeting. They don’t like “putting labels on money”. They have enough, so why bother? Why not just make the choices as the desire arises? I have a few answers for that:

How you budget your each dollar determines where you keep it.  If you don’t have a budget to help you make good choices as to how much you keep in checking, savings, CD’s, a retirement account, a 529, or a traditional brokerage account, you end up with:

• money in your checking account that should be in savings, earning better interest
• money in your savings account that should be in a brokerage account, earning better long-term returns (if invested properly)
• money in a retirement account that should be in a 529, allowing you to save for your children’s college education without jeopardizing your retirement
• money in a brokerage account that should be in a retirement account, not getting taxed
• money in your employer’s stock that should be in checking or savings, avoiding unnecessary risk

and so on. I see a new example of misplaced money every day, and in each case, they’re losing money, and lots of it — in terms of taxes, interest or capital gains lost, unnecessary risk taken, etc. How much is it worth not to even bother taking stock of your values, or what you might wish you had saved for in ten years?

Money that doesn’t get budgeted often get spent for you. By this, I mean that it goes towards things you don’t really value. The thought occurs to you to buy something, and you shrug and say, “I’ve got the money; why not?” So you accumulate stuff and experiences as the thought occurs to you, rather than thinking about what you truly value. (Note: this is not to knock spontaneity — just as long as it fits with your values!) You spend money way out of proportion to the value you get out of it, and still end up with a vague feeling of unhappiness…so you spend even more money next time, and the cycle continues.

You leave a huge legacy that you didn’t intend. Maybe you don’t spend your money…so you die sitting on a pile of cash. Now, again, a legacy can be a good thing — if it’s planned. However, I’d take a serious look at “Die Broke“; in it, Stephen Pollan makes some excellent arguments for building your legacy while you’re still alive. Certainly this is the case if you have children or grandchildren; in the former case, why not help them out with their first house, their first child, their new business, rather than waiting until you pass on? In the latter, why do them and the world the disservice of making them spoiled “trust-fund babies”?

Your money gets burned by inappropriate investments. What does everyone say you should do with “leftover” money? Why, invest it, of course! So you play around with the stock market, or you have a friend who has this great investment opportunity, or you accumulate ridiculous numbers of shares in your employer’s company…but you have no plan, so when you actually need the money, it happens to be at a low point in that investment’s cycle. (Or, worst case, that “investment opportunity” goes up in smoke!) So you “sell low”, defeating the whole purpose of investing in the first place! (Unless you just enjoy gambling, in which case there’s this whole city I know that’s pretty much built around exactly that…)

So do you have to budget every penny? No. You don’t have to become a spreadsheet junkie with hundreds of budget categories who meticulously enters their transactions every week. Just keep an eye on your finances. Think about what you value. Don’t be afraid to put labels on your money — and to move those labels around as circumstances and your values change!

Your money — and your future self — will thank you.

A lot of people shudder when they hear the word “budget”. And why shouldn’t they? The popular view is that a budget is like a diet writ large — but instead of just limiting your eating, it’s limiting every fun part of your life! No wonder virtually no one keeps a budget — trying to actively limit every single aspect of your spending is a sure recipe for burnout!

Luckily, budgeting doesn’t have to be like that. Enter descriptive budgeting.

Prescriptive budgeting is what you traditionally think of when you think of budgeting: “I’m going to write this number down and pinky swear (or, even better, establish a system like the envelope method) that I’m not going to spend more than X amount on Y.” It’s certainly not a bad thing, and it’s often quite necessary, but it’s not the be-all and end-all of budgeting. As I mentioned before, trying to make it the be-all and end-all can quickly sap your motivation.

Descriptive budgeting is simply entering into your budget what you predict you will spend. You’re not making any effort to throttle back; you’re just stepping outside yourself and saying, “Given what I know about myself (or my family), and what YNAB/mint.com/Quicken says we’ve spent in the past, how much will we probably end up spending this month?” You already use this for mostly-constant bills, like auto insurance or your rent, and even bills over which you only have partial influence, like your utility bill.

Note: you can combine the envelope method and descriptive budgeting! In other words, just because you’ve decided to pay cash for everything doesn’t mean that you’re actively limiting your spending everywhere. For example, I know some dedicated Ramseyites who pay cash when fueling up their car — not because they’re trying to cut back on gas, but simply because they don’t want to use plastic anywhere. In most of these cases, they use descriptive budgeting to allocate what they think they’re likely going to spend to that envelope. (A little more, actually, because running out of gas money before you run out of month would be pretty disastrous to most Americans!)

So to summarize: with your descriptive budget categories, you’re just putting down What It Is, while with prescriptive categories, you’re putting down What You Want To Do. “OK,” you say. “That’s an interesting little bit of semantics, but…so what? Why even bother with descriptive budgeting at all?”

Fear not — these questions and others will be answered in next week’s post!