Jonathan, the founder and editor of HumbleDollar, joins us again on the NGPF Podcast to speak about his new book: My Money Journey, How 30 People Found Financial Freedom And You Can Too. Producer’s Note: This is a podcast episode you don’t want to miss!

Resources:

• Humble Dollar
• My Money Journey

Ren Makino: Hi, this is Ren from Next Gen Personal Finance and you're listening to the NGPF podcast. Today on the show Tim is joined by Jonathan Clements. Jonathan started his career at Forbes and later became the Wall Street Journal Personal finance Columnist. Many Wall Street Journal readers, including Tim, grew up reading Jonathan's columns and can say they are in a lot better financial shape because of the wisdom that Jonathan provided in those columns. After the Wall street Journal, he worked at Citi group, took on a couple of other jobs before settling in, in 2016 and started the Humble Dollar blog. The blog hosts, a phenomenal stable of writers who really look at personal finance from different perspectives. He's the author of many books, but is joining the NGPF podcast to speak about his newest one: My Money Journey, How 30 People Found Financial Freedom And You Can Too. I hope you enjoy

Tim Ranzetta: Welcome, Jonathan. 

Jonathan Clements: Hey, Tim, it's great to be with you. I even stayed up late, you know, it's seven o'clock on the East Coast. Normally this is my bedtime.

[00:00:59] What Does Financial Freedom Mean?

Tim Ranzetta: Early to bed, early to rise. Maybe that's gonna be some of the advice you give, but you're out with a new book: My Money Journey, How 30 People Found Financial Freedom, and You Can Too. Jonathan, I wanna start with a definition. Tell us what you mean by financial freedom.

Jonathan Clements: So when I think about financial freedom, Tim, I really think of it as having two elements. The first element is getting yourself to the point where you don't regularly worry about money. It's not necessarily that money buys happiness, but not having money can buy unhappiness. So you wanna get to the point where you have enough saved or you have enough regular income coming in that you don't regularly think about money. You can't avoid all worries about money that just comes with the territory, but to the extent that you don't think about money on a day-to-day basis, that is a wonderful source of financial freedom. And the other element of financial freedom is being able to spend your days doing what you want, having that freedom to decide how you're gonna use every hour of the day. Again, it's never total. There're always gonna be dentists to go to and doctors to visit and, you know, waiting for the service guy to come by and fix the heater or whatever it is. But still, to the extent that you control how you spend your daily life. That is the other key element of financial freedom.

[00:02:29] Origin Story of My Money Journeyz

Tim Ranzetta: Tell us, you've written a lot of books about personal finance and this one is unique. Talk a little bit about the origin story behind it. 

Jonathan Clements: I launched this website back at the end of 2016, humbledollar.com. And when I launched it, you know, I really didn't have some grand plan for what this site was gonna be like. I had this money guide that I'd been putting out for a couple of years. I just thought, oh, I'll throw it up on the web and make it freely available. And, you know, I'll blog once a week or so and I'll invite some people I know who are interested, see if they wanna blog as well. And that was as grand as my ambitions were. Today, the site publishes, you know, one or two articles every day. I've got this. Group of 50 to 60 writers who contribute some every week, some every six months, but most of them are just everyday Americans who have a keen interest in personal finance. There are some financial advisors in there. There are some people who are recognized as being financial experts. Most of 'em are just everyday Americans. And what I say to these folks is, you know, you may not be an expert on the financial world, but you are an expert on your own life. So if you write about what you've experienced financially, you can do that with authority. So that has become a staple of the site. People writing about their own financial experiences. 

Get back to late 2021, it was a suggest that we should do a book. And so the obvious thing to do was to have people write about their financial journey. So what you get in My Money Journey is 30 people talking about their journey to financial freedom or how they expect to reach financial freedom in the relatively near future. And they talk about it from their perspective. And I think for people who read the book, you know, there are a number of things that will be interesting. But I think one of the things that will jump out at people, I hope, is that for once you're actually gonna read an honest discussion of money. We talk freely about our religious views, we talk freely about our political views. Some people even talk freely about their sex lives. But very rarely do people talk honestly about money. How many people have told you how much they make, how much they are worth. And yet, if you read My Money Journey, a number of the contributors do just that. They'll tell you how much they're worth, how much they make. They'll talk about the mistakes they made and their successes, and I hope that it's a breath of fresh air and this great financial dialogue that we're all having. 

[00:05:11] Hitting the Highlights

Tim Ranzetta: So they wrote those stories but you edited all of them. What were the most frequent edits that you found you had to make? In other words, what were the biggest challenges, perhaps in people putting their thoughts down on paper about their money journeys that you found the need to edit? 

Jonathan Clements: Well, the good news is that most all of these folks had written for Humble Dollar before. So they were used to what I expect from them in terms of honesty and what I expect from them in terms of prose. I think that one of the skills with writing is to think less about being comprehensive and more about what's gonna be interesting to the reader. And you don't want to write the phone book from A to Z detailing every little thing about your financial life. What you do is hit the highlights. And those highlights should be things that carry a lesson. Because in the end, you know, the goal here is to teach people about money. And those stories, if well told, can be really powerful. They can be inspiring and they can teach. And so, you know, in editing these essays, what I encouraged them to do through the edit editing process was to get rid of the stuff that's superfluous and focus on the stories that really carry a lesson with them.

[00:06:29] Inspiring Stories 

Tim Ranzetta: All right. I know this is probably like asking about your favorite children. But aside from your story, which is one of the 30, which did you found most inspiring? Now, you know, many of these writers, cause they've written for you over time on the blog, but I have to believe there were some stories where people revealed things that were quite eye-opening or inspiring for you.

Jonathan Clements: One of my favorite stories in the book was written by a guy called John Goodall. And John used to be a lawyer in the Army. He actually relatively recently left the Army for family reasons. And he talks in his chapter not about how he was successfully thriving towards financial freedom, but the occasions on which he decided to take a diversion. In other words, to take his foot off the pedal and not charge quite so hard towards financial freedom. And one of the things that he did was to step away from the Army. If you're in the army full-time for 20 years, you get this incredible pension, it's equal to 50% of your final three years earnings in the army. And the longer you stay beyond that, the higher it gets. John left six years short of the 20 year mark because he had adopted three children from Colombia and he really felt like he couldn't be moving them around the country again and again, which is what the army life is like. And so in that story, you know, I appreciated that he made it clear that money isn't the only goal here, right? You've gotta enjoy the journey as well as worry about the destination. And it was clear from John's story that he was thinking about the journey and making sure that he and his family enjoyed it. 

[00:08:15] Enormous Parent Influence on Money 

Tim Ranzetta: Now you do a great job in the introduction to the book, kind of highlighting some of the themes that run through it, because obviously your book's title is How 30 People Found Financial Freedom, and you can too. Can you highlight maybe just three or four of those eight themes that you think can be helpful to everyone. 

Jonathan Clements: Almost all 30 of the essays start off with people talking about their upbringing. Now, maybe that's not entirely surprising because that's the beginning of everybody's story, but what you gather from that is that the influence of parents on their children's financial habits is just enormous. And it's scary. If you're a parent, you know, I have two kids, and you start to realize that when you talk to your kids about anything, it's like you have a megaphone up against their air. Everything you say sounds 10 times louder than it sounds coming from anybody else. And the people in the book, the contributors, talked about what they learned from their parents and sometimes they adopted what their parents said and sometimes they rejected it.

But in many cases, they spent their entire lives grappling with what they learned about money from their parents. And one of the things that, you know, no surprise here, I'm sure Tim, you will recognize this, one of the things I encouraged my kids to do was to be frugal, right? I mean, I was always talking about the importance of saving when they were growing up. My son will turn 31 this year, just finished his PhD. And so for seven years, you know, even as he traveled the world doing archival research and so on, he was on a stipend of about $30,000 a year. Henry recently told me that over the course of his seven years collecting $30,000 a year, he managed to save more than a hundred thousand dollars. And my reaction was, hmm, maybe those lessons about frugality were emphasized just a little too much, you know? Cause I wonder what wanted to say with him was, oh, Henry, please cut yourself some slack. You don't have to save quite that much money. But that's what he did. And that I claim credit for that. I also, you know, take blame for that. You know, he didn't have to be quite that frugal. 

I mentioned this earlier. You know, a lot of people fess up to their mistakes, particularly early in their investing careers. We all did that in our twenties. We all trade too much. We try our hand picking individual stocks, we buy actively managed funds. We think we know which way the stock market is going, which way interest rates are going. And you see that again and again in these stories. But, every one of these writers managed to overcome those early mistakes and still get themselves on the path to financial freedom. And the thing that overcomes those mistakes are those good savings habits.

If you have good savings habits, almost everything else is secondary. And good savings habits can compensate for bad investment decisions. So if you have good savings habits, if you're regularly saving 15% plus of your income every year, even if you don't make the best investment choices, you are gonna be fine come retirement. You just keep stocking away that money and good things will happen. Even if you don't necessarily make the best investment choices. 

[00:11:40] Keeping Investing Simple

Tim Ranzetta: Yeah. Let's talk about investing choices because I know for educators who are with us today, this can be one of the most challenging topics for them to teach, and yet it seems in your book, simpler was better in terms of their investing strategies that help them get to financial freedom. Talk a little bit more about that. 

Jonathan Clements: Wall Street has a huge incentive to make investing complicated, because if investing is complicated, it's much more profitable for Wall Street. But when it comes to everyday investors, the more complex an investment product is, the higher the fees are gonna be and the less money is gonna end up in your pocket. I mean, it's a story that's been told over and over again. What you want in order to achieve financial freedom is to buy simple investment products that you truly understand that have low annual expenses. I mean, I realize that in a lot of school districts and a lot of 4 403(b) plans, that is a hard thing to achieve.

I know the insurance companies are in there with these high price variable annuities where teachers are just getting a rotten deal and you know that all kinds of things are going on to prevent better investment products being included within the plans. If you're in a teacher and you're in a plan that has these high cost variable annuities, you should be screaming and yelling and saying, this is not right. We want some low cost investment products. I mean, there are variable annuities out there that charge 3% of assets per year. 3%. That means that if you know the market's return 10, you're gonna walk away with seven. By contrast, if you go to low cost investment firms, you've not gonna pay 3%, you're gonna pay 0.1%, which means if the market's return 10, you're gonna pocket 9.9. It's completely different universe, and the chances for money to compound at a brisk rate are far greater if you can get yourself into low cost investment products. 

Tim Ranzetta: So let's get into more specific about those products because you've been an early and frequent advocate about these products called index funds. Maybe just kind of give us a brief primmer on what an index fund is and why they tend to outperform 90 to 95% of active managers who are trying to beat that market index. 

Jonathan Clements: So if you look over a 20 year period, over 95% of actively managed funds, those funds run by high priced money managers who are trying to pick this stock over that stock and decide which way the market is headed. 95% plus of those active managers trail behind their benchmark index over 20 years. I mean, it is a story of massive, massive failure. So if you wanna do better than these 95% of losers, what you do is you buy broad market index funds. So what I'm talking about is a fund where there's no real manager. All they're trying to do is replicate the performance of the index, such as the total market index within the US or the S&P 500, or the Russell 3000. These funds buy many or all of the stocks that make up these indexes in effort to replicate the performance of the index. They charge minimal expenses. And that has been a recipe for huge success. And in fact', this is not a secret anymore. It was when I was started writing about them in the 1990s.

But today, there is more money in index funds than in actively managed funds. I mean, people have woken up and realized that actively managed funds generate lousy long run performance and they have flocked to index funds and any good employer plan, a 403(b) plan, a 401(k) plan should have a choice of index funds within it, where you do get to match the broad market and you do so at minimal expenses. 

[00:15:49] Why Active Managers Can't Keep Up

Tim Ranzetta: Again, Jonathan, for folks who may not be as familiar with investment products, they might be wondering, why these professional managers who have incredible pedigrees, right MBAs, they can analyze balance sheets and income statements. Most may wonder, but wait a minute, can't they figure out which companies aren't gonna perform in an index and just not buy them? Why do they fail? Is there a simple explanation as to why actively managed funds are not able to keep up with these broad indexes? 

Jonathan Clements: So if you're saying to yourself, why is it that 95% plus of active managers fail to keep up with their index over a 20 year period? It's not because they're stupid, it's because professional investors are super smart. And they are competing against each other. It's like, you know, Federer against Federer every day of the week in the stock market. And you know, your chances of finding a significantly undervalued stock when you have all these other smart people pouring over the market every day is de minimus. The market is, as the academics like to say, enormously efficient. Your chance of finding that superstar stock is so low that it's hardly worth considering. 

Yes, in retrospect, we look back and say, oh yeah, I should have bought Apple. Yeah, I should have bought Amazon, I should have bought Alphabet. But you know, people look back and say, oh yeah, I should have bought Enron. And then whoops Enron's suddenly in bankruptcy. You know, these hot stocks disappear all the time. I was actually just looking at some stats and amazingly, you know, something like 35% of the companies that have been around over the past 90 years ended up worthless. They were delisted by the exchange. Every one of these stocks seemed like they were a winner at some point, and yet they ended up completely worthless. Picking stocks, outperforming the market averages is enormously difficult because you are competing against highly intelligent, well-informed people. And there are no screaming bargains lying out there in the stock market.

[00:18:07] The Two Impulses Behind Investing 

Tim Ranzetta: So one of the other challenges with managing our own money is the psychology, and I think you highlight money has a lot of meaning to people that goes well beyond just maybe the things that they purchased. Talk a little bit about, were there any other psychological traits that you found, from these folks? 

Jonathan Clements: Of course when people talk about investing, they always talk about bear and greed, and those are big drivers in investing. You know, people have these two impulses within them. They don't wanna be poor, but they also want to be rich. And at various points in the market cycle or what's going on with the news, whatever it is, you know, one or other of those tends to come to the force. People suddenly become super greedy. They're like, okay, easy money to be made, let's buy Tesla. And next moment it's like, we've got a pandemic, everything's going to zero. I'm selling out now. And sometimes people get these decisions, right, but more often than not, they don't. And whatever you do, Whether you choose to sell or buy, you are gonna incur costs and those costs will drag down your returns over time. So you may or may not make good investment choices. It's sort of like a coin flip, particularly when the market is efficient. But whatever you do, you're gonna incur investment costs and those will be a dead weight on your returns and eventually drag them down so that you have well below market average returns over your lifetime. 

[00:19:47] How Much is Enough?

Tim Ranzetta: Was there any theme around this issue of enough? Did you find a consistent theme around that?

Jonathan Clements: I think the concept of enough is really an important concept to grapple with, particularly when you get to my lofty age. So I'm a little bit older than you, Tim. I'm on the cusp of retirement, and as I sit here on the cusp of retirement, there are two notions of enough that I struggle with. 

One, you know, whether I have enough. And the good news is I do. I know objectively that I have enough for retirement. There is always that little bit inside me says, oh, well, maybe a little bit more would be nice, but if you have enough, in truth, the the rational thing to do is to not be greedy and make sure that you manage your money in such a way that you don't get blown outta the water at this late stage.

But the other notion of enough that I struggle with is, have I done enough? You come to the end of your career and it's like, have I really achieved everything that I wanted to achieve. Maybe if I stick it out for a couple more years, if I write another book, if I, whatever it is, launch another website. And this notion of declaring I've done enough in my career is difficult. I struggle with that one. And I think one of the ways out of that is to realize that just because you're retiring doesn't mean that you're gonna stop doing. So even in retirement, we need a sense of purpose. We need a reason to get out of bed in the morning.

So even if you didn't do everything you want to do in your career, and I think that is true for most of us, it doesn't mean that your chance to have some achievements in your life ends when you quit the workforce. It's this usual sort of treadmill that we're on. It's not about the destination, it's about the journey. And you wanna make sure that even in retirement, that the journey continues that you have that thing or things that it's gonna get you outta bed in the morning, give your life a sense of purpose. 

[00:21:47] Blog Readership

Tim Ranzetta: Well, you've certainly given us a tremendous gift, Jonathan, cause I know you could have continued to roll out your annual money guide and gotten paid for it and instead started a blog that you make freely available. What's, what's your current readership? 

Jonathan Clements: So these days, the site should have about 5 million page views in 2023. The newsletter goes out to 21,000 people twice a week. And, you know, number of readers is a dodgy statistics. You probably know Tim, I mean, because you never know whether Google Analytics is counting multiple vice devices or just, you know. So I can tell you that a hundred thousand people come to the website every month, but I'm not sure whether that's really true or not.

 I'm gonna get outta my soapbox just for for a minute and I'm sure you won't stop me. One of the things that I would encourage people to do as they read financial information on the web is to think about how the sites that you are visiting make money. Because a lot of sites out there, particularly in the financial field, make their money either by running sponsored content, which means the articles weren't written by some independent journalists. They were basically fed to the site and then published. Two, they contain what's called sponsored links. So the site was paid a couple hundred bucks to stick a link in a story. So if you click on it, you go through to some site where they're gonna try to make money off you. And third, they engage in what's called affiliate marketing relationships. For instance, there are a ton of sites out there that hold credit cards and you wanna know why those particular credit cards are getting pushed. It's because those sites get a kickback if you click through and you sign up for that credit card. 

So, Humble Dollar and its humble way does not do sponsored links, does not do affiliate marketing, does not carry your guest posts that are basically long pieces of advertising. The only way we make money is through donations and by regular advertising. You really need to look at the sites that you're visiting and ask yourself, what is the financial incentive here? And am I being told something that is more profitable for Wall Street or this provider of financial products than it will be for me?

[00:24:07] Financial Honesty Over Time 

Tim Ranzetta: So what's true for financial products is also true for media. Make sure you understand the business model behind it and how they're getting paid and how that might have an influence.

I wonder, Jonathan, any of the 29 others, who wrote their stories, their money journeys in this book, came back to you later and said, thank you. Because we all have money scripts playing in our head, and until sometimes you put it down on paper and really reflect upon it, you're not actively thinking about, okay, what were the things, the lessons I learned from my parents that were good and what were lessons that maybe I need to discard? Were there any kind of epiphanies that people spoke of as they were writing their money journeys?

Jonathan Clements: I saw this less with the money journey essays themselves, because again, these folks have been writing for the site for a while. So, you know, they had already worked through their story in bits and pieces before they put down in longer form. Nonetheless, one of the things that I see in the essays is that people tend to become more honest over time. So when they write the initial article for the site, they may be a little bit more protective of themselves, a little bit more cautious about what they're gonna reveal. And then over time they become more relaxed and say, okay, hey, you know, I've been talking about myself and, you know, people are not beating up on me because I made this mistake or that mistake.

But, just picking up on that Tim, one of the things that I would encourage people who are listening to this to do is to sit down and write your own money journey. I think it's enormously valuable to sit down no matter what your age is and write about not only your life story, but also your financial story and it, and inevitably they're one and the same because almost every life decision involves money. So when you write your life story, you write your money story. Why should you do this? I think it's twofold. First, by writing down your financial story, your life story, gives you a chance to reflect on what you've done right and what you've done wrong, and help you to work through what your relationship with money is.

And that way it can help you be better in terms of handling money going forward. But the second thing is, this is something that your children, your great-grandchildren, your nieces, your nephews, your great nephews, whoever it is, would love to read. I mean, I know a lot about my grandparents. I grew up with them, I had many years with them, but I almost know almost nothing about my great grandparents. Would I like to read their account of their financial journey? Of course I would. It would be great to read it. So people should sit down and take a couple thousand words and write about their lives. Again, write about the highlights and the low points. And you don't have to write down, you know, everything from A to Z, but write it down and then put it somewhere with your most important papers so that if for chance you go onto the next bus, your story will be heard by the next generation, the generations that follow.

One of the things that I often say is that the only immortality we have in this life is the memory of others. Your family and your friends will remember you and. And you wanna make sure those memories are good and you wanna have a hand in promoting those memories. 'so write 'em down and make sure that that essay is there for people to find after you're gone.

[00:27:46] Fierce Frugality and Changing Habits

Tim Ranzetta: So Jonathan's story is Fierce Frugality. However you did open up at the end, I think it was towards the tail end of your story that you've become more carefree with money. And I think people often wonder, and I've seen this behavior time and time again, folks who have a history of frugality and then reach the point of enough, but still can't get beyond that level of frugality. What's helped you push beyond that? Because it is hard the older. We get to kind of change our attitudes towards money. 

Jonathan Clements: I think the thing that has helped me is not suddenly opening up the wallet and going out and buying a BMW or doing the round the world cruise. It's small spending. Because if you think about it, if you go out and you buy the latest electronic device for a couple hundred bucks, or you go out and you buy a brand new car, I can assure you that the happiness you get from the car, even if it costs a hundred times as much, is not gonna be as a hundred times as great. So by making more smaller expenditures and getting the sort of the pleasure of that that has encouraged me to spend a little bit more freely. And also I, at this point, I have a better idea of what I enjoy doing. So I enjoy traveling, I enjoy eating out. I enjoy experiences. I've gone to, I dunno how many concerts this year. So these are the things that I enjoy spending money on. And I will continue to spend money on it because I know that they bring me happiness. 

Tim Ranzetta: Any other things you can look at, say over the last five years, that's changed about your attitude towards money?

Jonathan Clements: I certainly look at my portfolio far less than I did, you know, five or 10 years ago. I just don't feel any great need to look. I think it's gonna be fine. One of the things I have been doing in recent years as I head into my sixties is trying to simplify my financial life. I've got rid of a few credit cards. I closed down a checking account. I've consolidated my investments and before ,and I don't wanna get too far into the weeds, but before I had a much more complicated portfolio tilting towards value, different parts of emerging markets, international, small cap, blah, blah, blah. And now my single biggest holding, and I hope this doesn't come across as an advertisement. My single biggest holding is the Vanguard Total World Stock Index Fund. I have a quarter of my money in that fund and it's a fund that gives you exposure to every stock in the world weighted according to its market capitalization. You can buy that fund and never look at it again because it's just giving you everything. I'm not making any market bet at all. I own that fund in my Roth accounts, these tax free accounts, and my goal is actually just to leave that money there and let it ride for the rest of my life and hopefully bequeath it to my kids. 

[00:30:54] Delayed Gratification

Tim Ranzetta: On the subject of kids. Cause it sounds like at least your son, you've transmitted your frugality to him. Any tips for parents? Maybe some tactics you used with your kids that you thought were effective around money?

Jonathan Clements: So the number one thing you want to teach your kids is to delay gratification, because if your kids can't be good savers, once they get into the adult world, if they regularly spend more than they earn, you know, they, they're gonna have a life of misery.

So you want them to have this ability to delay gratification, and you can teach delayed gratification in a whole host of ways. It doesn't have to be about, here's your allowance, but you can only spend half and you have to keep half of the future. When you insist to your kids that they practice the piano before they go out to play, or they do their homework before they watch TV, you are teaching them to delay gratification. If you tell them that they can't have dessert until they have their main course, you're teaching them to delay gratification. So teaching the delay of gratification is hugely important. 

The other thing that I think is important to do is to talk about money. Coming back to my money journey, the way we pass along values is in the stories that we tell. So if you have children, you should talk about what it was like in your twenties, when you were sharing an apartment with somebody else, you could barely had enough money for the rent. You had to think twice before ordering a pizza on Friday night. You can dress up these stories a little bit. It's okay to embellish, just make 'em really good. Make your kids realize that when they get out into the adult world, they're gonna need to be really thoughtful about how they use money. 

And the other thing I would suggest is to do a little show and tell. Show your kids your paycheck. You know, show them the tax return. They probably won't pay much attention the first time or the third time, but maybe on the fifth time they'll say, so what's this thing FICA that gets taken out? Why is that such a big number? And they will start to develop an interest in the financial world, and that's hugely valuable. You don't want to send your children out into the adult world in ignorance, because they will get taken to the cleaners. 

[00:33:15] Deferred Income Annuity

Tim Ranzetta: Jonathan, new financial products you're particularly excited about?

Jonathan Clements: I would say that one of the things that is not entirely new, but is getting more currency is something called a deferred income annuity. And what it is is you put down a bunch of money at, say age 65 to buy yourself a stream of income, starting at age 85. One of the biggest risks in retirement is running outta money. And by buying something like a deferred income annuity, also called longevity insurance, you can cut off that tail risk.

You can say, hey, if I make it to 85, if I can manage the assets I have to get through to age 85, then I've got this deferred income annuity to carry me the rest of the way. And because of the nature of the product, you're putting down money at say age 65 to create an income stream target at age 85, because a lot of people will not make it that far to collect that income stream.

And even if they do, they may not live many years beyond that. It's a relatively inexpensive way to cut off that tail risk to make sure that, you know, if you do indeed live longer than you ever imagined, that you will have this income stream. So you could imagine a situation where you had a dollar for retirement and you could take 15 cents to buy this deferred income annuity that's gonna pay you an income stream at 85, and then you take the other 85 cents and you just spend it down gradually over the next 20 years. It could be a very elegant solution to this dilemma of how do I make sure my money lasts as long as I do? 

Tim Ranzetta: I didn't realize low cost and annuity could be said in the same sentence. 

Jonathan Clements: So this is different type of annuity. Yeah. When I talk about annuities, it's, it's always gets to this point, right?

Because, you know, there are all kinds of horrible annuities out there. There are variable annuities, there are equity index annuities with enormous fees. By contrast, you know, The two annuities that I sort of like are immediate fixed annuities and deferred income annuities. And they do not get sold by insurance agents because the commissions on them are often just 1%. They are a very relatively low cost product and no insurance agent in in the world is gonna want to give up a whole bunch of assets into an immediate fixed annuity or a deferred income annuity and make just a 1% commission. That's why you don't hear much about these products, why they don't get pushed, but because they aren't expensive products is why you should be interested.

[00:35:55] Emotions Behind Diversification

Tim Ranzetta: That all makes sense. You made a great point, Jonathan, in your story also, which is really hard. It's hard for me to deal with, but you seem to be okay with it. It's this idea that you have a diversified portfolio. Talk a little bit about the emotions behind diversification. Cause to be successful as an investor, you have to diversify, but it's easy to look in the rear view mirror and say, well, why would I wanna invest in that? Cause it's underperformed when in fact that may be the exact reason you wanna invest.

Jonathan Clements: So right now a lot of people are saying, you know, you should never invest abroad because the past 10 years it's been US only. But if you look back over the past five decades, the 1970s international stocks outperformed in the 1980s, international stocks outperformed in the 1990s, US stocks outperformed in the 2000s international stocks outperformed. Then yes, in the 2010s US stocks outperformed. But we as human investors are so heavily influenced by the recent past that we forget that before the 2010s through the 2000s, the S&P 500 was a terrible investment. It barely made any money in the first decade of the current century. We should not be too influenced by the recent past. The only way to guarantee that you will get a part of the stock market action wherever it's carried, is to be globally diversified. And you know, I can't put my hand on my heart and swear to you that international is gonna perform better over the next 10 years. But if I was a betting man, that's what I would bet. I would bet that international is gonna have its day and in the sun because that is the way it's always tended to be. Whenever there's been a strong performance by one part of the global financial markets over a course of a decade, generally over the decade that follows the performance has been disappointing.

[00:37:55] Tax Consequences of Active vs Passive Index Funds 

Tim Ranzetta: And Jonathan, I think the other thing that people often miss about the difference between active and passive index funds is the tax consequences. Can you, can you talk a little bit about that? 

Jonathan Clements: So, let's say that you are a super safe and you are maxing out your employer's retirement plan and you have additional money that you want to put away each year. If you're going to save in a regular taxable account where whatever you do in that taxable account could potentially trigger an immediate tax bill. The best way to invest a regular taxable account is to buy and hold broad market index funds. Like the Vanguard Total Stock Market Fund or the Fidelity Total Stock Market Fund, or the Schwab Total Stock Market Fund. With these funds, because the funds themselves aren't actually trading. You will get very low tax bills each year out of those funds, and instead, the gains will grow over time, untaxed.

And the only time you're gonna realize a tax bill is when you turn around and sell it. By contrast, with most actually managed funds, because that manager is buying and selling stock constantly within the fund, those funds tend to generate big tax bills every year. So if you're investing through a regular taxable account, the rationale for owning index funds. The incentive to own index funds is even greater because they are much more tax efficient than actually managed funds.

[00:39:24] Last Word from Jonathan

Tim Ranzetta: All right, Jonathan, we are at time here. I'm gonna give you the final word. You've got over 105 educators here. They work in middle schools, they work in high schools, they work at nonprofits, but I want to give Jonathan the final word here before we close it out.

Jonathan Clements: Hey, I'll just leave everybody with one last financial tip, and it's a very simple financial tip. Which is to sit down and create a financial wishlist of the things that you would like to do in the years ahead with your money. Think about the trips you wanted to take or the cars you wanna buy, or the other possessions you want to purchase. And there are two great reasons to do this. 

One is, if you wanna make smart decisions with your money, you need to think about it. Whenever we make impulse purchases or we make impulse investment decisions, we often get it wrong. But if we write it down and we think about it for a while, often we'll realize what it is that we really want to do with our money.

And second, to the extent that you write down the things that you really want to do. And say, okay, in 2024, I want to take that cruise. You know, in 2025, I wanna buy that new car. To the extent that you are thinking about these things far ahead of time, you will have this long period of eager anticipation.

And often when we spend money, the best part of spending money is the anticipation. Just think about that holiday that you booked for in advance, and you thought about it, and you thought about it and how much you looked forward to it, and then what it was like when you actually went on the holiday.

Probably half the time the anticipation was better than the holiday itself. So create a wishlist. You won't regret it. 

[00:41:19] Conclusion 

Tim Ranzetta: Love that advice, Jonathan. Thanks for sharing your wisdom with the NGPF community. Once again, you've helped us all. So thank you for what you do with Humble Dollar. I hope you don't retire soon because you're providing so much value to the community. And I just really appreciate your giving back, because again, I know this is a labor of love for you, and you've brought together this incredible stable of writers and really just had a tremendous impact, I think, on how people are able to navigate their financial lives. So thank you. 

Jonathan Clements: Oh, thank you for the kind words, Tim. And it's been fun talking with you. Thanks for having me on. 

Ren Makino: I hope you enjoy this episode with Tim and Jonathan. I have a few final housekeeping items before we go. The show notes and full transcript can be found on ngpf.org/podcasts. You can also join these sessions live and ask the speaker questions by signing up for the NGPF speaker series sessions that occur on Thursdays at 4:00 PM. Pacific Time. You can sign up to attend on ngpf.org/virtual-pd. Please be sure to subscribe to the NGPF podcast on iTunes, Spotify, Stitcher, or wherever you get your podcasts. Better yet, leave us a review. We love hearing from you and it will help us reach a broader audience. On behalf of Tim and Jonathan thank you so much for tuning into this NGPF podcast

About the Author

Ren Makino

Ren started interning at NGPF in 2014, and worked part-time through high school and college. With his knowledge growing alongside NGPF, he joined the team to work full-time after graduating from college in 2020. He is also the producer of the NGPF podcast. During his free time, he likes to try out coffees from different roasters across the world.