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Don't Do Dumb Things With Your Money

The personal finance expert and author of The Dumb Things Smart People Do With Their Money shares her three-pronged approach to financial success.

Jill Schlesinger, a business analyst for CBS News, joined the latest episode Morningstar's The Long View podcast this week to discuss Social Security, the labor market, inflation, and popular questions from her podcast Jill on Money

Here are some excerpts on Schlesinger's tips for financial success, how to navigate inflation, and paying down a mortgage from her conversation with Morningstar's Christine Benz and Jeff Ptak:  

Three-Pronged Approach to Financial Success 

Benz: Speaking of that three-pronged approach, which you urge people to focus on: wiping out credit card debt, focus on funding their retirement accounts, and building that emergency fund. Most recently, I noticed that you were telling people to really focus on the emergency fund piece. Why is that? Is there something about this particular environment that makes you think that having liquid reserves would make sense more than usual?

Schlesinger: Remember the earlier comment that I always think like the worst is going to happen, that I'm a worrywart? 

Benz: Right. 

Schlesinger: This is something that is sort of in my DNA. But I think there's an interesting timing issue that is helpful. And that is, before we had a once-in-a-century pandemic, I would talk about an emergency reserve fund and say, "You never know what's going to happen." And it was kind of a nod toward you could lose your job or something, you could get injured, and you'd lose income for some reason, and you'd want an emergency reserve fund. And I think that after going through what we've gone through in the last couple of years, I think people are more attuned to the idea that weird stuff can happen from out of the blue, and the people who have an emergency reserve fund--those that had six to 12 months of their living expenses socked away in, yes, a boring, barely interest-bearing account--they seem to be a lot calmer amid a crazy time. Even those folks who were already retired who had even more than that one year set aside, maybe it was even two years, they were able to weather the emotional disruption that you feel when bad things happen, knowing that I don't have to go into my account, sell anything because I have to pay the electric bill. So, I do think that I used to say I treat all three equally. I'm nudging toward emergency reserve fund because I think that it is something that gives people great comfort, and it can prevent you from doing something stupid.

How Much Do You Really Need to Save? 

Benz: I noticed that you said six to 12 months' worth of living expenses. I think some people may have heard three to six months. Can you talk about how that seems so daunting for young investors, who are barely getting by and then to talk about having like a year's worth of income saved? It just seems like a lot.

Schlesinger: I think that it may be a lot and may not be necessary. And if you have two young people who were teachers, and they are a couple, and they have very consistent cash flow, maybe the six months is just fine. But if you had two contract workers, one gig worker who is doing graphic design with somebody, or even just alone, and has inconsistent income, then I think you do have to be a little bit more careful. So, the range is a range. I hate rules of thumb. Everybody knows that I get very petulant when it comes to giving rules of thumb. That one is a rule of thumb because it's just easy to say, but everyone's situation is different, obviously. So, if Christine has this great job, totally secure, knows that if anything bad happened, there are parents there to help you out. Yeah, maybe. But I still think it is a very good practice to consider, like when you're looking at investing. Before you start going crazy investing, you really do have to have some safety net. And the next time we go into a recession, I'm going to guess--I could be wrong--but I'm going to guess that you're not going to get rounds of stimulus and extra unemployment benefits to help you out.

And so, when you consider how to build a financial foundation, having an ample emergency reserve fund has to be the critical aspect of this. And it's not sexy. It's like saying, do you know how many people at work I know, who are incredibly bright people, who just will not get their acts together to do their estate planning. And I cannot for the life of me figure out--do they think they're not going to die? Is this their secret maybe? And it's not these meat-and-potatoes aspects of financial wherewithal and wellness. To me, I'd rather talk about that all day long than talk about investments, which I find  incredibly boring. And it's actually very easy to be a good investor. Again, you just have a well-diversified portfolio, you buy index funds, you put it on autopilot, and you save a bunch of money. It's not that much harder than that.

How Can You Protect Yourself From Inflation? 

Ptak: You mentioned that you're a worrywart by nature. I think a worry for many now is inflation, which has surged over the past year. If people are concerned about higher inflation, what steps do you think they should take to protect their financial plans and their portfolios?

Schlesinger: Well, I think the first thing that's really interesting to me is that everybody says, "Oh, inflation, inflation, inflation." Now, you bring this up two years ago when we were sub-2% inflation, and I loved it when people would tell me about their retirement plans. I'm like, "What inflation rate did you use, just out of curiosity?" And people would say, "1.5%, 2%." OK, fine.

So, I think the first thing to remember is that if you're creating a financial plan, which everybody should be, that I always plug in the higher-than-anticipated inflation rate and the lower-than-expected investment return. And then you can really start to test whether your plan holds up or not. Now, do I think that we're going to have 7% inflation for the next 30 years? No, I do not. Do I think it is possible that we go from 2% to 7% but only get back to maybe 2.75% or 3.00%? Yeah, we could be in a higher inflationary environment longer than anybody would like to think about.

Traditionally, when you look at inflation in general, stocks do start to roll over a little bit in the beginning, but they don't do so badly in an inflationary environment. So, I still like stocks. I do like shortening the duration of bonds. Having hard assets is not a terrible thing. So, having a REIT or having a little commodity fund might be a decent way to do it. But I wouldn't go crazy, either. I don't think that when you're in an inflationary environment, and we're seeing a surge like we are right now, I do think that the most interesting part is that we have a lot of people who have never seen inflation. And that goes for a number of people who are managing money, this is the younger people. I think it's fair to say that anyone who is under the age of 40 has never really seen any sustained inflation. And so, this is really spooky to them, and I get it. But I also want to be clear that we have a Federal Reserve whose job is to maintain price stability and also full employment. And it might have taken them a little bit longer than I would have liked, but they seem to be coming around to the idea that this inflationary pop needs some attention, and they're going to take care of it. It's not going to be fun, and they may overshoot it. But I wouldn't go too nuts trying to prepare for 7% inflation for the next 30 years, because I just don't think that's going to happen. You could throw a little I Bond money in, and you could have some TIPS--although you're probably late to the TIPS market--but I Bonds are not paying a decent number right now. It's only $10,000 a year, but it's not a bad thing to just park some money there.

Supply Shortages and Buying a Home 

Benz: Speaking of inflation, home prices have been inflating really rapidly in some markets, and that seems to be largely because there's a supply shortage. How would you urge homebuyers to proceed in such an environment so that they're not locking in a home purchase at what in hindsight was an inflated price?

Schlesinger: I think back to people who bought homes in 2005 and 2006--'04, '05, '06--and the housing bubble was really inflating then. And if they were buying for the long term, and it made sense, it doesn't feel good to be like, "Oh, I've just bought the top." But years later, winds its way down, and you're no longer buying the top. And now, we have a housing price surge, which kind of tops where we were beyond that time. I guess, in my heart of hearts, number one, even though I own two dwellings, I hate being an owner. So, I really like to encourage people to continue to rent if they feel comfortable renting. And I also just would say that if the numbers work for you, and you can do this, then great, do it. I wouldn't stretch. In this kind of an environment what's great to do is to look at it from the other perspective, which is I own a home, I'd really like to downsize, I'd really like to go somewhere else. Is that an opportunity? Rolling down is a much more interesting prospect than rolling up. But if the numbers work, and you're going to be in a house for a long time, then buy your house. And don't worry if the prices are high right this second and don't worry that mortgage rates are a 0.5 point higher than they were six weeks ago. If the numbers work for you, if you're secure in your earning power, if you haven't committed too much of your money to this endeavor, then go for it.

Paying Down a Mortgage 

Ptak: What about the paydown of a mortgage? That's an evergreen question that we get, whether to pay down a mortgage or invest in the market? How would you suggest that people arrive at the answer that makes sense for them?

Schlesinger: It's so funny, because I think it's one of the huge questions that I get asked all the time on the podcast. I would say paying down a mortgage and Roth conversions are my top two questions that we get at Jill on Money. It's funny. If you've got piles and piles of money that is sitting in cash, and you're really not doing anything with it, and you're not going to deplete your entire emergency reserve fund by paying off your 3.5% 30-year mortgage and there's six years left, then fine, go for it.

What I think is more troubling for me is that a lot of people who are in the position of wanting to pay down their mortgages would be doing so at their own peril. And what they would be doing is they'd be soaking up and taking all the liquidity that they have. So, maybe they've got a brokerage account or some money in cash, and they would be willing to just basically take that down to almost zero, pay down the mortgage, and then they leave themselves with very little emergency reserve. And this is often a question I'll get asked by people who were a few years out from retirement. And I'd say, "Whoa, whoa, whoa." Before you just take all that gorgeous liquidity that's sitting there, all that money, you have to understand that paying down the mortgage may feel good today, but if something bad happens, now you're forced to then invade a retirement account and pay taxes when you may not want to. And so, I think it's really case by case.

Generally speaking, it's not something that I love that most people would do. But if you're fortunate enough to be in a position where it's really not going to undo any of the great planning you have already accomplished, and you can take the money and say, "I was lucky" or "I got a windfall, and I can use it." And it may not be financially the smartest move because I do understand--I wrote a whole book about the dumb things smart people do with their money. And I do understand the emotions that surround the idea of carrying debt. But I would just caution people that if you are going to be depleting money that you may need as a cushion in the future, it's something I would be very careful about doing.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.