This week I have something a little different: a tribute to one of my personal finance mentors. My father-in-law—known to his family as Papa—passed away last week. After 96 years, he had developed a number of money habits that were unconventional but quite effective. I’d like to share three of those with you.
1. Focused Frugality
Papa was frugal but not in the conventional sense. He didn’t practice extreme frugality and saw no virtue in intentional self-denial. Rather, he practiced what I would call focused frugality. If something was important—his children’s education, for example—he was happy to write that check. He also loved to travel. In those cases, Papa left frugality at the door. But for everything else, he stretched a dollar as far as it would go. And that ended up being remarkably far.
In his later years, I served as my father-in-law’s informal financial advisor. During one of our periodic reviews, he asked what I thought about his asset allocation—that is, the split between stocks and other assets in his accounts. I responded by asking a standard question for financial planners: “How much do you need to withdraw from your account each year?” His reply was one I had never heard before—certainly not from a retiree. “What do you mean by need?” he asked. After some more discussion, I realized that, even in his late-80s, his retirement accounts remained untouched, other than for required minimum distributions from IRAs. How did he accomplish this? In large part, I believe, it was this focused frugality.
The lesson: A penny saved is a penny earned. Even if you spend freely with one part of your budget, that doesn’t mean you need to abandon frugality altogether. You can take nice vacations and drive a nice car and still clip coupons. These are not mutually exclusive; in fact, I see them as symbiotic. When you economize ruthlessly in one area, that allows youto spend freely in other areas.
2. “Inefficient” Debt Management
It would be an overstatement to say my father-in-law hated debt. That wasn’t the case. But, having grown up in North Africa, he simply wasn’t accustomed to it. To be sure, he took out a mortgage to buy a home, but other than that, I don’t think he ever carried a dime of debt. No credit cards, no car loans, no home equity line of credit, nothing. In America, where consumers hold more than $4 trillion of debt, this certainly made him unusual.
I always found this interesting because any personal finance textbook will tell you that debt, used wisely, is not necessarily a bad thing. Conventional wisdom, in fact, states that consumers should be happy to borrow money when it enables them to invest and earn potentially higher returns. Papa, however, wasn’t interested in what the textbook said. He took a much more straightforward approach: He would buy something only if he could pay cash. And if he couldn’t, the purchase would simply have to wait.
The lesson: In theory, it is inefficient to avoid any kind of consumer debt, even a car loan. But my father-in-law was not the only one to realize that “efficiency” is just a textbook concept. In the real world, there are many benefits to limiting debt. Of course, there is a peace-of-mind benefit, but there’s another, more subtle advantage: When you stick to cash for major purchases, the inevitable result is that you end up spending less. In fact, research has found that consumers spend up to 50% less when they use cash instead of a credit card. Looking to trim your budget? Try leaving your credit card at home for a week.
3. “Inefficient” Asset Allocation
For a typical retiree in his 80s or 90s, a typical asset allocation would consist mainly of bonds. My father-in-law, however, never saw the appeal of bonds and instead limited his portfolio to only stocks and cash. Was this inefficient? Yes, perhaps he could have earned more by owning bonds instead of cash. But this is what he preferred.
The lesson: The definition of the “best” investment portfolio isn’t necessarily the one that offers the greatest profit potential. The best portfolio, especially for a do-it-yourself investor, is the one that is easy to set up, is easy to manage and allows you to reach your goals. You run a far greater risk, in my view, trying to make your portfolio more “sophisticated” than you do by simplifying your portfolio. Remember, simple doesn’t mean simplistic.
I first met my future father-in-law when I was in grade school. I will truly miss his wit, wisdom, kindness—and financial mentorship.