Clark Howard: Financial Well-Being Starts With Being a Smart Consumer
The consumer advocate digs into buying homes and autos in a constrained-supply environment, mortgage paydown vs. investing, and why he loves target-date funds.
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Our guest on the podcast today is consumer advocate and personal finance expert Clark Howard. Clark has been hosting the nationally syndicated radio show and podcast The Clark Howard Show since 1989. He's also the author of 10 books, three of which have been New York Times best-sellers. He also sponsors the Consumer Action Center, which is a free resource for advice on money and consumer issues. He received his B.A. in urban government from American University, and his MBA from Central Michigan University.
Home Ownership, Debt, and Investing
"Should I Pay Off Debt, Save Money or Invest?" by Christopher Smith, clark.com, Feb. 18, 2021.
"How to Pay Off Debt and Save Money on a Fixed Income," by clark.com staff, clark.com, Nov. 25, 2020.
"Key Rules for First-Time Homebuyers and Investors in Real Estate," by Clark Howard, clark.com, March 22, 2017.
"Clark Howard Has Advice if You're Looking to Buy a Home Amid the Pandemic," by Sarah Thompson, wokv.com, Sept. 29, 2020.
"86% of Renters Can't Afford to Buy a Home: Here's How You Can Prepare," by Charis Brown, clark.com, April 17, 2017.
"Should I Buy a House in This Crazy Real Estate Market?" by Craig Johnson, clark.com, Feb. 21, 2022.
"Clark Howard's Special Rule for Refinancing Your Mortgage," by Nick Cole, clark.com, Aug. 28, 2020.
"How Old Is Too Old to Take Out a Mortgage?" by Craig Johnson, clark.com, Nov. 1, 2021.
"When Is It OK to Have a Mortgage in Retirement?" by Clark Howard, clark.com, March 22, 2017.
"Should I Pay Off My Mortgage Before I Retire?" by Wes Moss, clark.com, Feb. 20, 2019.
"What Is a Reverse Mortgage and Is It Right For Me?" by clark.com staff, clark.com, June 19, 2020.
"3 Things to Know Before You Lease a Car," by John Cress, clark.com, July 20, 2020.
"New vs. Used Cars: Which Should You Buy?" by Dallas Cox, clark.com, Jan. 24, 2022.
"New Report: These 2022 Vehicles Are the Best for the Money," by Craig Johnson, clark.com, Jan. 21, 2022.
"Are You Following Clark's Maximum Auto Loan Length Rule?" by clark.com staff, clark.com, April 27, 2021.
"Free Budget Worksheet: The Clark Method to Create a Monthly Budget," by clark.com staff, clark.com, Feb. 18, 2021.
"How to Save and Invest the Clark Howard Way," by Christopher Smith, clark.com, Jan. 25, 2021.
"15 Financial New Year's Resolutions for 2022," by clark.com staff, clark.com, Dec. 17, 2021.
"8 Spending Habits People Are Changing After Coronavirus," by Craig Johnson, clark.com, June 19, 2020.
Investing and Retirement
"How to Start Investing and Saving for Retirement," by clark.com staff, clark.com, May 20, 2021.
"How Retirees Can Combat Inflation," by Christopher Smith, clark.com, Dec. 1, 2021.
"What Is an Annuity, and Why Does Clark Think They Stink?" by Christopher Smith and Clark Howard, ajc.com, May 27, 2021.
"Why Clark Howard Is Obsessed With Roth for Retirement Savings," by Christopher Smith, clark.com, Feb. 23, 2022.
Finding an Advisor
"How to Find and Choose a Financial Advisor," by Christopher Smith, clark.com, March 25, 2021.
"How Much Does a Financial Advisor Cost?" by Christopher Smith, clark.com, Feb. 24, 2021.
"Follow Clark Howard's #1 Rule to Travel Cheap," by clark.com staff, clark.com, Jan. 28, 2022.
"How to Plan a Trip: Clark's Best Travel Tips to Save Money," by clark.com staff, clark.com, June 10, 2021.
Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance and retirement planning for Morningstar.
Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.
Benz: Our guest on the podcast today is consumer advocate and personal finance expert Clark Howard. Clark has been hosting the nationally syndicated radio show and podcast The Clark Howard Show since 1989. He's also the author of 10 books, three of which have been New York Times best-sellers. He also sponsors the Consumer Action Center, which is a free resource for advice on money and consumer issues. He received his B.A. in urban government from American University, and his MBA from Central Michigan University.
Clark, welcome to The Long View.
Clark Howard: Thank you.
Benz: Well, thanks for being here. It seems like when it comes to personal finance matters, the discussion often moves immediately to investing and away from some of the day-to-day financial decision-making that you focus on so much in your work. Why do you think that is?
Howard: Well, because if you think about the investment community, which is where most of the energy is in anything involving personal finance, it's really skewed toward higher-income earners. And they're looking what to do with additional, potentially disposable income, where the typical American is just trying to make ends meet paycheck to paycheck, month to month. And my role has been to serve people, who for the most part, find there's more month than money. They really feel like they're drowning financially; they don't know where to turn, what to do. And that has turned out to be my principal role is serving people who just don't know how to squeeze every dollar so that they can meet more than just their regular daily and monthly expenses.
Ptak: It sounds like you focused on spending and being a smart consumer, because you saw an inviting opening there. Is that right?
Howard: No, it just kind of emerged organically. And my background was really, really odd. And I don't know how much you want to know about it. But I was, and I've always been, an entrepreneur from very young. I started my own company when I was 25, sold it at 31 and retired and moved to the East Coast of Florida, and was a beach bum for a good while. And then just kind of ended up piece by piece, bit by bit, giving advice in the media about how to handle your money. And it just kind of happened because my expertise, and the company that I sold was a chain of travel agencies back when that was a great business to be in. And I started off in radio and TV, giving advice about travel. And just over time, it morphed into more general stuff about the wallet. And it became today a pretty sizable organization with websites and newsletters and social media and podcast and radio and TV.
Benz: When someone goes on Clark.com, they can find guidance on nearly any money-related topic. It's really just a fabulous resource.
Howard: Thank you.
Benz: Well, it is. But I'm curious, there are a lot of links and sponsorships and all that. So how do you ensure the independence of your editorial content? Apart from all of those advertisers and sponsors and so forth?
Howard: That's an awesome question because it is a real sore spot in the modern digital-media era. When is content essentially advertorial? When is it being written, because it supports an ad buy? When are they sponsored stories? And my feeling was, that becomes a slippery slope. And I have a privilege in my life. As a retired guy, I don't need the money. But what I do need is my reputation and integrity. So, in everything that I do, the ad side has nothing to do with the content. You take the websites--we have a Berlin Wall, which anybody younger, they don't really know what the Berlin Wall is, or you mention East Germany, and they're like, "What's that?" Anyway, the idea is that the individuals who do the links that are posted in a story, those are posted after a story is written, and the writers have no idea whether a story they're writing just attracts eyeballs or attracts eyeballs and, as a result, revenue. We don't allow any sponsored stories, and absolutely never write any advertorial or allow any advertorial.
The other thing is, I test a lot of products and services, and I buy them all. And anything that any of our writers want to write about, we pay for it, just like Consumer Reports would, because we've got to be unbought and unbossed. Because something you may not know about me, I'm the dullest person alive. You could take a long list of people--I am a really dull guy. So, if people are going to come to me for information, it's got to be because it's based on trust. And I want people to know that even if they disagree with me, that what you're hearing from me comes from my head and my heart. And it's something that has always been communicated to our team, which is now a combination of full-time paid people and contractors, 37 writers. And they all understand that we have one job, and that's to have integrity in everything we do.
Ptak: Wanted to switch and talk about big financial decisions. It's a big focus of your work. One of the big issues that households wrestle with is how to deploy any extra funds they have available, should it go to debt pay down or investing? How would you advise them to approach those kinds of household capital allocation decisions?
Howard: There is no one right answer, but I want to start with the base of what I try to drill in my audience's head. And that is that it needs to start at a baseline. If I can reach somebody in their teens and 20s--it starts with when you're getting a regular paycheck, that you set up your life, where you're saving at least a dime of every dollar you make from the get-go. But a lot of people I reach later, where they've gotten into too much fun with credit cards or other debt. Or they could even be people who ended up with student loans that are a burden. And so, then I face the challenge you just placed before me, which is what do you do when you've got this goal of trying to save for a rainy day, trying to save, let's say for down payment of a house, trying to save for retirement. And at the same time, you've got this debt over here. It's overwhelming for people.
What I encourage people to do, and it really somewhat depends on how difficult somebody's situation is with debt, is what I call the 1, 2, 3, where you take $1 and put it toward savings, $2 toward debt, or $2 toward saving and $1 toward debt. Because you can't do everything. But what changes the balance of $1 to $2 or $2 to $1 is how heavily you're indebted, that if you're carrying a lot of debt, that you're looking at years and years and years, if ever, to pay off, and you're paying high-interest rates on that debt. Then your highest priority--two thirds of the money you're putting aside to deal with debt or savings, two thirds goes to debt, one third toward savings, but money needs to go to both. I don't want people to feel so overwhelmed that they never, never, ever get started with saving for their future. And that's why it needs to be a part of it all through the process, even when you're trying to extinguish debt.
Benz: You referenced homeownership as a goal, and we've had this frenzied homebuying market over the past year; seems like there's a shortage of inventory in a lot of markets. So how can homebuyers protect themselves in this sort of environment? Especially first-time homebuyers who aren't necessarily selling something that has appreciated a lot. How can they make sure that they're not buying at a high point?
Howard: I went through this with my oldest child, who is 32, and she and her husband buying their first house in the teeth of a very rough time to be a first-time homebuyer. And my advice to them is the same I give to any first-time homebuyer right now. The core to how you deal with an inflated market, where you have really inflated prices on homes, but at the same time depressed rates on mortgages, even though mortgages have gone up recently, they're still by historical measures very low. It's your cycle of ownership that is core and key to dealing with an inflated housing market. And so, I encourage first-time homebuyers to buy a home that they feel, barring some unexpected life circumstance, that they can spend a decade or more in that property. Because the lower monthly payments, the lower interest rate, that gives you that lower payment, you help negate over time a lot of the inflated housing price that you're having to absorb as a first-time homebuyer.
Ptak: And what if you don't have that kind of time horizon, would you advise someone in that situation to rent?
Howard: I know this is cruel and brutal, but I recommend that people rent. And a lot of, particularly younger married couples, really don't like when I say that, because there's something about the circle of life that you pair up, and maybe or maybe not you're going to have kids, but then you go and you buy a home, that's part of the process. But the reality is, that is a psychological thing, when your ownership cycle is going to be shorter in a time where prices have gone up so much in housing, that in most markets in the United States, renting in a shorter term is a smarter decision for your wallet than buying. Because we're outrunning people's affordability of homes and builders are doing a lot. If you read their financials, they're doing a lot to acquire land banks, as they refer to it, to continue to build; we've got a lot of multifamily being built. The imbalance with a shortage of homes that may be somewhere around 4 to 5 million housing units in the United States, that's going to solve over time.
And so, the runup in prices we've had is not sustainable, adjusted for inflation over a long period of time, because you just can't support a housing market where you've outrun people's ability to afford. I used to say you needed to own a home seven years to make the math really work with the costs in buying and the cost out selling. But right now, I've added to that hitting the decade, the 10-year mark, because of all those factors I just named--that being a renter becomes a much smarter decision every year you intend to own less than 10 and particularly less than five years.
Benz: You referenced some of those transaction costs associated with buying and selling homes. Sometimes I think those really get lost in the shuffle or people underestimate that. Can you talk about that? Because it seems like that's another headwind. If you're someone who is planning to cycle through home purchases pretty quickly, that can really cut into any money that you might be able to earn from that experience.
Howard: Sure. And one thing that can frustrate people in the financial industry with me is a lot of times I do back-of-the envelope numbers. So, know that the number I'm going to give you now is not precise. But it's to try to make a point to prospective homebuyer. I call it the 10-and-10 rule. The figure you're going to have roughly 10% of the cost of buying a home in and 10% out. There are so many expenses involved in establishing that house. All the expenses with getting that mortgage, closing on it, the money you have to spend on possessions and purchases for the house; things you might even not think about that you're going to have to buy: a lawn mower, washer and dryer. There's an endless list of things you have to buy going in. And, so, I just try to get people to think of whatever the purchase price is, and figure it's 10% of that for everything all in involved in you buying that home. And then obviously going out when you're selling. Most people are going to have a significant real estate commission, plus the repairs a buyer might have you make, and other expenses you have fixing up the property for sale. So that's why I just call it the 10-and-10.
Benz: How about older adults who are getting close to retirement, should they retire their mortgages prior to retirement or is it really individual dependent?
Howard: There's a certain amount of individual nuance on it. But when I talk to somebody who's, let's say around 50, and they're moving to a new home, and they're asking me about the interest rates on 30-year mortgages, I pretty much am ready to have my blood pressure checked. Because that means if you at 50, are taking out a new mortgage, you still have it at age 80. And that's no way to live. When you cycle into a home in the core years of middle age, I want you to take out a 15-year loan, I want you to be mortgage-debt-free. So that you have wiggle room, you have freedom in retirement to be retired. Very few people--unless they're in a job where they make a great deal of money, and they've been just fantastic savers, or they're the tiny percent of people who get a wonderful employer-provided pension--very few people have as much cash flow in retirement as they had pre-retirement when they were still working full time at their chosen job or profession.
I want people to be mortgage-debt-free in retirement, but I don't want you to do it at sacrifice of everything else. I will talk to people who are several years from retirement, and they've stopped saving any money for retirement. And everything they're doing is devoted to this single-minded goal of being mortgage-debt-free. But the issue with that is that you can't eat your house. So, if you have not generated money in savings that you can draw on in retirement, it's fantastic, you own your house free and clear. But you still have a significant cash flow problem. It is all based on where the person is financially at the point they're asking me the question. And the question you posed to me, I get most often from people about mid-50s or so--that's when they're asking me, “Well, what do I do? I got this mortgage, and I want to be able to retire at blah, blah, blah, age? Should I just do everything I can to pay off the mortgage?” And the answer is, it really depends on me, going through a series of questions with them about everything else they've done, and everything they've got that they've saved.
Ptak: Maybe to stick with that topic, housing and that older demographic, I think you've been pretty critical of reverse mortgages. But it's also true that some older adults have more housing wealth than they have in liquid assets. So, who are reverse mortgages right for and, conversely, who should avoid them?
Howard: I love that you asked me this question. Because reverse mortgages are for some people, the way I put it, is least-bad choice. Because there's a lot of expenses involved in establishing a reverse mortgage. So, you eat up some of that equity you've worked so hard to build. On the other hand, if somebody is extremely cash poor and their house, for many people, will be their best asset they can draw on. And if you don't have kids, you're worrying about inheriting, doing a reverse mortgage is great. I want you to go through with an accredited housing counselor to understand all the elements of doing that reverse mortgage and know that you're going to pay the fees up front. But the ability to get money every month, almost like using your house as your own personal pension fund is a viable alternative when someone is facing poverty, because they don't have, beyond Social Security, they don't have real resources other than the value of their home.
What I do like is for a parent to say if they've got one, two, or more adult children, say, “We want you to know this is what we're thinking of doing--we're thinking of taking out this reverse mortgage. It means there'll be no house inheritance. Just want you to know about this.” And that's the situation. The alternative, particularly if you have a child or two who's fairly affluent, they may do the equivalent of being the provider of the reverse mortgage for you, which would eliminate the costs that you would have with a reverse mortgage. They end up inheriting the property, and so they're the ones that float the value to you. That is an alternative where you have parents who are short of funds and adult children who are in a position to support their parents' lifestyle.
Benz: A related question is the flip side of that, where the parents float the private loan to the kids who want to buy a house. And so, it's maybe a better yield to the parents and so forth. But can you walk through whether you think that's a good idea within families, for the parents to be making the loan to the kid?
Howard: It's a great idea for the kids; it's not necessarily a great idea for the parents. Because as a parent, if your kid comes to you for a private mortgage, and let's say they've not been the most careful and responsible with their money. And the mortgage payments are late, or they don't show up. What are you going to do as a parent? You're going to foreclose on your own kid, or you're going to support your kids' lifestyle? And the problem of not being financially responsible, it is a very, very difficult thing. I get a lot of questions from people about co-signing for a car loan for their kids or lending their kids money. I'm such an optimistic person, but on this one issue, I'm gloom and doom with people. I really lay out, "Well what would you do if your kid did this? Or your kid didn't do that? Or your kid just walked away? Or they didn't make the payments on the car, are you going to make the payments?"
And the funny thing I hear over and over again, from parents, girlfriend, boyfriend, siblings, when I ask the question about being a co-signer, for a vehicle loan, and I ask, “Are you in a position to take over the payments, if the person you want to co-sign for doesn't make the payments?” And I'll tell you, probably three quarters of the time, the answer is, “No, I can't afford those payments.” And I'm like, “Then you can't co-sign, because it's your credit that gets trashed. And you also are in position of facing repo action where they come after you for deficiency of the loss from the repo of the vehicle and your credit's fouled up for seven years, and so on.” So, I work really hard to be a complete nuisance to people, when they ask me a question about doing a private loan or being a co-signer. Because they need to know that there's more to it than just being a generous soul or feeling guilty.
Ptak: Since we're talking cars, how should people decide whether to buy or lease a car, in your opinion?
Howard: Buy, buy, buy, buy, unless a vehicle is nothing but lifestyle to you. The people who lease a vehicle for 24 to 36 months are doing so because it's what they like, it's consumption to them. And every single person who does that, you are taking on the lion's share of the depreciation of the vehicle, because vehicles lose the greatest amount of their value at the most rapid rate in those first three years. So, when you are someone who says "I don't care, I just really like having the new wheels every two years, every three years." Particularly true, with a lot of luxury car buyers who love having the fancy German wheels. When you are that person, you understand that is a lifestyle decision you're making, and you don't mind spending the money, go for it. But if you want to preserve your wallet as much as possible, you buy a vehicle. If you buy new, I want you to drive it till the wheels fall off, or equivalent minimum 10 years. But vehicles are made so well now that a vehicle can last a really, really long time. We tire out of a vehicle way before vehicles tire out on us.
And when you own a vehicle new and 10 years or longer, you've really flattened the depreciation curve. And your cost of ownership declines so much year by year by year, even when you factor in the cost of repairs. And if you like to buy used cars--normally, right now the used market is going through enormous distortions because of the chip shortage, and used vehicles have gone way up in price. Normally, if you buy a two- or three-year old vehicle and keep it a four-year cycle, that's the equivalent of buying a new vehicle and keeping it for 10. But one of the oddest things going on right now in the vehicle market--and it is a temporary disruption because of the chip shortages--is, it's not at all unusual to see a one- or two-year-old version of a model selling for more money in the used vehicle market than a brand-new one. Because the used one you can get right away, the brand new one, you may have a wait of two to six months to get.
Benz: What's your advice for car buyers in this environment? Some people can wait, but some people literally cannot wait. So how should they proceed?
Howard: If you can't wait, look at the brands that in the most recent reporting for the last quarter, were having far fewer problems producing vehicles--they were much less affected by the chip issues than others. Top of the list of that, Toyota. If you go look on Auto Trader, and you look where you select new vehicles, and you look at how many of every model of Toyota pretty much is available right now that you can buy in dealer inventories around the country. It's shocking compared with many other automakers. I don't know what Toyota did. I don't know what Tesla did. Well, I do know some of what Tesla did that they'd been much less affected by the chip shortages. But these two automakers seem to be in a much better position to deliver vehicles, new ones that they have in stock at their dealers and around manufacturer's suggested retail price, rather than the big markups above suggested retail that a lot of other dealers of other brands are selling for.
One other brand seems to have been less affected by the chip shortages as well is Hyundai and their sister company KIA. But other than those four companies, the chip shortage has really made it a brutal time to buy a vehicle. And there's one particular model from General Motors, that is a deal right now in the marketplace, it's the Chevy Bolt--b-o-l-t, comparing it to the discontinued Volt. The Bolt is a vehicle that seems to be an unloved player in the electric vehicle market. But it has a good range--about 250 miles on a charge. There are some ‘21s still available on dealer lots around the country. And GM is giving a huge rebate on ‘21s. Meaning that if you shop around, you can get a brand-new one for about $26,000 to $28,000 if you buy a ‘21, which, in today's marketplace, is great. And the demand of the public for more affordable new vehicles is so gigantic. I don't know if either of you have heard of the Ford Maverick, which is a new pickup truck from Ford. And Ford had to discontinue taking orders for a year, because they've sold out every bit of their production capacity already, till '23. And that's because the Maverick starts at $20,000.
Ptak: What about car loans? We've seen the terms of car loans get stretched way out as car prices have increased, and you've referenced some of those increases. You're against some of these longer-term loans. Can you explain why?
Howard: I'm not sure if I've got grey hair and a bald spot because of having three teenagers, going through the stages of being teenagers, or if it's my upset with people taking out long-term vehicle loans. Because when you take out a loan longer than 42 months, you are setting yourself up for a disaster, because for almost the entire length of your vehicle loan, you are what they call in the slang of the trade" upside down"--owing more on your vehicle than what it's worth. And so, you're putting yourself in a position where you're pricing your life for perfection. But things happen--people lose jobs they thought they were safe in. And people go through divorces, they get ill--all kinds of things happen. Life's not perfect.
So, you don't want to put yourself at a disadvantage where you owe more on a vehicle for year after year after year than what that vehicle is worth. And that sweet spot is 42 months or less. So, what I say is that if you cannot afford the payment on the vehicle you're interested in at a payment cycle of 42 months, then you can't afford that vehicle. I'm always trying to get people to eat their spinach instead of having candy. It's just the way I am. But it's all about you being able to have all the candy you want later in your life, because you were careful and took care of yourself financially through your working lifetime.
Benz: Switching gears a little bit, I wanted to tap your expertise on budgeting. I was involved in a great discussion about budgeting on Twitter. And I contended that it's better to just set a savings target and try to hit it rather than getting really granular about tracking spending. Where do you come down on that issue? Is that line-item expense tracking essential? Or can people go without it?
Howard: My belief is the people who do really conscientious work tracking their spending and using a budget are people looking for affirmation; people who are already great at it, who already live well beneath their paycheck. And it's their way of patting themselves on the back--one of the apps uses green, meaning you're meeting your goals and red that you're not. They get to see a line of green just looking through the app. I'm with you that the budgeting apps are not where it's at; that the goal upfront is to learn to live on less than what you make. And by setting yourself on a path of that by always saving money first and the easiest, although not always the best, but the easiest, is if you have an employer-provided retirement plan, where you set it on an automatic pilot, and you've got a minimum $0.10 of every dollar you make going into that retirement account. And my preference is for really dull investments, which I know runs counter to a lot of the Morningstar community, but I'm really into dull, because remember, I already told you I'm the dullest person alive.
Benz: We're into dull, too.
Howard: So I'm with you that, that the budgeting tools are not what I think are important. What I think is important is if somebody says, "I don't have any money to save a dime of every dollar I make and participate in that 401(k), or set up a Roth IRA, and put money into it every month." That's when I say, "I want you to do something really painful. I want you to record everything you spent for two weeks. I want you to write down every time you bought a sandwich, every time you went to Walmart and bought whatever, everything you spent money on. I want you to look at your monthly bills, credit card, checking account, and see what automatic bills you have. And then let's start looking at what are the things in your life that you can create some freedom in your life by reducing those expenses or eliminating some others."
Because what we found out early in the pandemic, back in '20, was so many people were shocked at how much less money they suddenly started spending in parts of the country where there were tight lockdowns. And this has been something that I think behavioral economists have been just stunned by is that how much of people's spending was discretionary. And a lot of times, people who are living, what feels paycheck to paycheck, or maybe they are living paycheck to paycheck, and they're making an amount of money that they should certainly be able to have more money to draw on. It was clear from what happened in the spring and summer of '20, that we could do a lot better with everywhere we're spending money.
And there's a lot of expenses we have, that we just pay them because we pay them: the gym membership; whatever we're paying for our cell phone without shopping to see all the new lower-cost plans that are out there; what we're paying for Internet connection; what we're paying for all these streaming services we're doing. When's the last time you watched this one, that one, or the other? I bought annual on something called Paramount+, and my renewal is coming up, it’s $100 for the year. And I don't watch TV, I only watch football. But that's the only time I watch TV is to watch football. My TV and football things are about to stop really soon with the Super Bowl. And so, I've been polling my family members--do any of you watch this Paramount+? And I'm so far out of four people, I've asked two and I got zero who've actually watched anything. So that's the kind of thing I want you to do. I want you to think about what you're just obligating yourself to month after month, or in the case of the Paramount, it was an annual for $100. Are you really using this? Is this useful in your life? Would that $100 be better in my wallet? And my opinion is yes, it would be.
Ptak: Since you mentioned it, do you think that the pandemic, tragic and disruptive as it's been, do you see any evidence that maybe it's helped to instil healthier saving and spending habits in those who have been affected by it? Or do you think a lot of that has just faded as things have reopened?
Howard: We did see a massive increase in the personal savings rate. In that time period I was talking about in '20, where we were finally an Asian country, because across Asia, except for South Korea, it's very common that people save roughly a third of what they make. And in America, depending on the year, we tend to save $0.05, $0.06, $0.07 on the dollar, typical personal savings rate. And then, all of a sudden, we're saving 30%. Well, that has fallen back to close to historical averages, from what I've been reading, somewhere around $0.07 on the dollar people are saving. I think people know, from what they experienced almost two years ago, that you can save substantially more. But people like buying their stuff--whatever stuff that is, people like buying it. And consumption of goods has gone up a lot as people have diverted from travel, eating out, that kind of thing. And people, instead of continuing to save that money, have transferred it into buying new big TVs or whatever, whatever. And so, it is hard for us, in our culture, to really put an emphasis on delaying gratification and making sure you put the savings building blocks in place.
Benz: You're often sharing ideas about how to save money. And, in fact, you just mentioned a few, like looking at all those subscriptions, looking at your cell phone, looking at your cable TV services. What are the other areas that you consider low-hanging fruit? If someone wants to try to find money in their budget to save, where should they focus their energies?
Howard: Every personal finance person in the United States picks on Starbucks, and says, you just give up that Starbucks habit and you're going to have $1,000 a year. Or, I forget who did the math on bottled water--if you stopped buying bottled water, that the average drink or bottled water, will have $1,400 more at the end of the year. So, there's a lot of things that are different person to person. But it surprises people where what seems like a small daily indulgence, that if you multiply that out by 365, you can find suddenly a new $500 or $1,000, or $1,500, that's in your life that was just disappearing before. I don't want to guilt trip people about this, I want to be something you want to do, because you want to bring that power back into your life and have money instead of owing money.
So, it really is about you doing that two-week thing I alluded to earlier, where you write down, either in a notes program on your phone, or even have one of those micro-spiral notebooks, so you can write down everything if you prefer pen and paper. And you'll see where that money's going. Where is it for you that little things you do over a couple of weeks, that making a change with those suddenly generates money in your life? When somebody tells me they can't come up with $200 a month to go into a Roth IRA--I know that's a lot less than the max--but, $200 a month is a number I talk about a lot. I also refer to it as $50 a week, which is not really accurate, since there's 4.3 weeks in a month.
But trying to drill it down to making decisions where you put aside a steady amount of money for your future. I want you to think about a goal like that, that you're going to accomplish by reorienting and rethinking how you spend all the time. It's not enough to say to somebody, “You're probably throwing away a lot of money every week or every month,” or whatever. It really has to be with, “if then”: If you control that spending and you reduce it, you could then accomplish this. And over a long period, you would end up with a great deal of money in your life and give you more choices about when you retire and what kind of retirement you'll have.
Ptak: I wanted to talk about inflation for a minute. How can people protect themselves against inflation? Or I suppose even a more basic question is, should they be doing things to try to protect themselves against inflation?
Howard: People are already doing it. I'm a big Aldi shopper. I don't know if either of you shop at Aldi, but Aldi is the German discounter that is soon going to be the third-largest supermarket in the United States. And there's another one on the Eastern Seaboard I shop at called Lidl. Both of them are German rivals that have come into the United States. And I get really frustrated when I go to my Aldi--which is a three-minute walk from where I live--and they're sold out of all kinds of things, not because the supply chain, but because people have suddenly discovered it and it's busy all the time. And the register lines are really long. I think that people have, in a lot of cases, adjusted particularly to food-price inflation by changing what they're buying. I saw recently that the sales of private-label store brand had been going way up over the last year or so, as people deal with the the crunch to their wallet of inflation. And people are changing where they shop.
So, they're changing how they shop and where they shop. If the inflationary cycle is not a transitory one; if this is something really being baked in the American cake, and we have significant inflation over time, it will reduce people's standard of living. We're not there yet. We haven't had inflation for a sustained long enough period of time that it's really harming people's lives and long-term prospects. But if we don't get the inflationary cycle under control, it will cause real harm, because the easy stuff people are doing--changing where they shop and how they shop--but once you get into sustained inflation, that one-time benefit is not there anymore.
Benz: Speaking of saving money, you were a travel professional earlier in your career, you mentioned. And I think we could do the whole segment on saving money on travel. But what are your main tips for people who have pent-up demand through the pandemic and want to get back out there and travel?
Howard: Well, I didn't travel at all till I got my second vaccine in February of '21. And then I've been in the air ever since--I've been on cruises. I've been back. I'm out there and I've traveled…
Howard: Yes, even gone on a cruise. I went on the first cruise from a U.S. port after they were shut down for 16 months. And it was great being on that first one and getting the experience. I know, with Omicron some people have had terrible experiences on cruises recently with the outbreaks on ships. But I've been out there, I've been traveling and I've noticed that it's going in waves. And there was a decline in travel during the peak of the delta. There's obviously been a decline in travel during the omicron wave.
But now, people seem to be interested again. I can tell by the mix of questions we're getting that people are getting out there again. And I think we're reaching that psychological point--it's not a specific day; it's not a specific event. But I think people are going to just say, “You know what, I've given up two years to this thing. I'm going to take my chances and live my life moving forward.” And I think you're going to see travel recover transoceanic, which has been deader than dead could be dead. Across the Atlantic, from mostly the East Coast, and then across the Pacific, mostly from the West Coast, that this is the year people are going to be back doing it.
But my key rule to saving money on travel--I know it sounds like a joke, but it's actually not--is that instead of focusing on a destination and a date, let the deals drive your trip. You'll eventually see the whole world. I've been to every continent except Antarctica. I've been to--I don't even know how many countries I've been to--not 100, but close. And I just buy the deal. I take my staff on a staff trip every year--a reward trip--we do some meetings and then they get to play. A newbie on my staff will say, “When are we going and where are we going?” People just start laughing, because everybody who's on my team knows we go wherever in the world goes on sale.
And that's how we decide. And so, if you let the deal drive your decision, you'll be able to go a lot more places. You'll see everywhere--you won't do it in the order maybe you intended-- but with deregulation of travel everywhere in the world, letting price be your friend is how you get it done. And I've noticed just recently that there have been some really, really good fares to Europe. After the airlines gave up for a long time, there are a lot of really great deals being posted for spring, with fares from around the U.S. to a lot of places in Europe, in the threes, the fours, and the fives round-trip.
Ptak: Wanted to turn to investing in retirement. Your website is refreshingly opinionated in terms of discouraging investors from some activities like options trading, buying crypto. What's a short list of strategies that most individual investors should avoid?
Howard: So first, I should tell you, my core audience are people who are not investors in any way, shape, or form. They are not sophisticated or really that interested in investing. I recommend very, very basic strategies to people in their investing as they are starting out, or they're doing a 401(k) at work, or something like that. The things that I say are not necessarily right for someone who is a sophisticated investor, or someone who is a big-time user of Morningstar content. Because I'm not dealing with people who've even ever heard of Morningstar, or any other investing advice organization or rating organizations. I'm dealing with people who come from a family where no one has ever had a stock brokerage account, or mutual fund account, or investing account.
So the reason I wanted to frame that is my advice is so basic. In a 401(k), pick the year closest to when you're going to retire and put all your money in the target-retirement fund, period, end of story. And the reason that's what I say is because if someone has no interest, or desire to learn about it, but they know they need to save, what I find is that most often they go into the stable value choice or something like that, the closest to a savings account, or CD possible in a 401(k). And, as we know, that's not going to get it done. That's not going to grow your money. You're not going to outrun inflation; you're not going to get the advantage of putting money aside for the decades that you're working.
I want people to go 100% in, in that target-retirement fund, because it's the easiest spot. Now let's say somebody's doing a Roth IRA. I want them to do a Roth IRA only with a low-cost company. I call them my three favorite children: Vanguard, Fidelity, and Schwab. And if they go to any of those three, I want them to go in the target-retirement fund choice. Somebody is opening an investment account, I'd love for them to go to Fidelity. And I know it's gimmicky. But with a regular investment account, go into the Fidelity ZERO funds, where they're doing no commissions up front, no ongoing management expenses, and they own little pieces of the whole market. So, if I could give advice that was less individualized, I don't know how I could, because I'm broad-brush painting for a target audience that doesn't understand, and doesn't want to have to understand, the mechanics of investing. And I want them to build that financial security at the lowest possible cost they can.
Benz: It appears that you are really pretty downbeat on annuities as well. Downbeat maybe is an understatement. But maybe you can walk through your major reservations there? And also, do you think actually, some sort of annuity can make sense? You mentioned how few people have pensions today. Can a really basic, low-cost annuity maybe make sense in that context?
Howard: So if my math was right, you cussed five times in that question. Because everybody knows who listens to my podcast or reads my stuff, that that is a curse word. And we're a family podcast that I do. And we have lots of children listening, and I don't like them to hear cuss words, like annuity. So, annuities, by their very nature, are not evil or bad. And there are certain annuities, I'll start with the good, that are great. I believe that generating essentially your own pension check for the rest of your life is awesome, because you can generate a lot more reliable monthly income. By turning money you have into a life annuity or immediate payout annuity, both terms are used interchangeably in the business. And then you have done, just what you said--you've re-created a pension for yourself where you didn't have one. And you don't have to worry about outrunning your money, outliving your money.
The other one I really like is the longevity annuity where you don't buy it to go into effect. So, you buy it when you're younger, but you don't get any money, unless you have a really lucky birthday, whatever birthday it is that the longevity annuity starts paying, most often at 75 or 80. Because the greatest danger that a lot of people face is that they expect they're going to live to the same age as their mom or dad who may have died at a relatively young age. And then, gosh, they lived a really long time, and they're out of money. And so, the longevity annuity means you can spend every penny you've got. And then up to the point of that 75th or 80th birthday, and then the money thrown off by the longevity annuity is enough to supply your needs for the rest of your life. The insurance company is also making an actuarial assumption, knowing that odds are really good you might be gone before that day ever comes. You get a bigger benefit than mathematically you might have otherwise, if you weren't accounting for all the people who just didn't make it to that point. Now then let's move to every other annuity: hate, hate, hate, hate, hate.
The annuities that are various forms of index annuities, which are so hot right now, where the insurance salesperson says, “This is great. You can never lose money if you buy this thing, and you'll get the return of the stock market.” And then you get an insurance contract that's 150 pages long, written by lawyers that designed it so that no one including the insurance salesman would have any idea what that contract says. So only if you do every possible thing it says, are you actually guaranteed not to lose money, number one. Number two, you don't get the return of the stock market; you only get a portion each year, in an up year, of the return of the stock market. You don't get the benefit of dividends, which are a big part of what the benefit is of being in one.
And you also face brutal surrender charges. If you for some reason want to bail at some point, you have to pay this massive amount of your money to the insurance company for wanting your own money back. Not to mention that there's the other angle, which insurance salespeople sell these as if they have great tax treatment, where the reality is your earnings are subject to ordinary income tax, where people investing traditional ways, benefit from the much lower capital gains tax rate. And I can go on talk about each of the various types of annuity garbage that are these massive commission products that are never bought, they're sold by aggressive salespeople who tell you only a portion of the truth leading to a big lie.
And you can see why I'm never invited to any insurance company event to receive some kind of award because my brother sells insurance, my middle brother. And he was telling me a story one day that one of his friends was listening to me and got so upset, he pulled off the freeway, got out of his car, and went around the car screaming and yelling, pounding his feet in the dirt. Because he just was insulted by what I say. But how do you counter that as an insurance salesperson when the industry refuses to live by the fiduciary standard, fights every attempt to live by the fiduciary standard? Because if they live by a fiduciary standard, they could never sell the garbage that they go out and rip people off with every day. And as you can tell, I have no opinion about these products.
Ptak: That's a good segue to the last thing we wanted to ask you about, which is finding financial advice. One of the, I guess you could say, perverse things about investment advice that define a quality advisor, you actually need to be knowledgeable. And I think you've actually alluded to some of the perils that attend to the process of finding an advisor that puts your interests first. What tips do you have for consumers who want to delegate financial decision-making to a professional? What should they look for? And then also, what should they pay? What's your perspective on the type of fee structure is best for consumers seeking financial advice?
Howard: When somebody's starting out, and they're my core audience, where they really lack knowledge about how the investing world works, what the terminology means and all the rest, I like for them to potentially default to the various robos, whether it's Betterment or Wealthfront, or using the Vanguard advisory services where they take on fiduciary duty, and they have the one that's all automated, and then they have the various levels with humans involved. And Schwab has the Intelligent Portfolios, which have been very controversial, but I think are a good starting point for people. And then Fidelity has its version of fiduciary advice that is mostly robo.
Why do I default to those five? Because the way you frame the question. When you're dealing with people that are newbie investors, they haven't saved a lot of money, their first job is to accumulate. And later in life, as they develop more money, it becomes a bigger focus. That's when it becomes valuable both to the advisor, who's a fiduciary, and to you, as the investor, to hire somebody who is much deeper in financial planning, looking at your estate issues, will, what are your long-term goals? How are you doing meeting them? That it's not about picking and choosing investments, when you get to a real advisor, with real fiduciary advice, it's much more about dealing with you holistically and the family issues. And let's say you're in a second marriage and you got blended families, and what do you do about the kids and all that, that a real good, solid, fiduciary financial advisor is not going to start touting, “You should be in this limited partnership; or we should have you in this series of stocks.”
That's not where it's at. It's about working with somebody to give them the advice they need. Maybe they're a small-business owner, and there's questions about succession and what do they do with selling the business? How do they pass it on to another generation? Where does life insurance fit in with being able to retain the business and have a family member takeover? These are the kind of things that become more clear and absolutely essential, once somebody has gone through the initial accumulation phase of building wealth.
Benz: Well, Clark, this has been such an illuminating and fun conversation. We really appreciate you taking time out of your schedule to be with us. It's been a treat.
Howard: It's really fun to do this, because of the the thing I've mentioned a few times is that I'm speaking to such a different audience than you are at Morningstar, that I'm dealing with people who are not in the orbit of normal investing. And it's just so great. It was really fun for me to hear what type of questions you were curious about. And I've loved doing this.
Benz: It was fun for us, too.
Ptak: Thank you so much.
Howard: Thank you.
Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
You can follow us on Twitter @Christine_Benz.
Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.
Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)