Saturday, November 11, 2017

Deliberate Experiments, Personal Finance, and Living a Better Life

I recently came across a great article at Medium by Michael Simmons entitled Forget The 10,000-Hour Rule; Edison, Bezos, & Zuckerberg Follow The 10,000-Experiment Rule. The article’s chief argument is that one of the most common traits of successful people is that they’re always experimenting and trying new ways of doing things to see if the results exceed what they’re currently doing, which is decidedly different than the heavy level of routine that most people apply to their daily choices.

It’s a great idea, well worth digging into, but let’s back up a bit.

Deliberate practice The initial premise of the article stems from a well-known claim by Malcolm Gladwell from his book Outliers that in order to achieve outstanding success in a particular area, one must devote ten thousand hours of deliberate practice to that area. In the book, Gladwell points to a lot of examples of this, with The Beatles’ absurd practice and performance schedule in the late 1950s through the early 1960s as they developed as a band being one particularly memorable example among many.

Deliberate practice, for those unaware, is a practical and systematic approach to practice, with the intent of being more mindful at building up the specific small skills that make up the larger skill you want to master.

For example, Benjamin Franklin used to apply deliberate practice to his writing by taking an article he respected, writing down the meaning of each sentence, rewriting the original article from the list of sentence meanings, and then comparing the original article to his new one. This process worked most of the skills one needs to be a writer and breaks them down into deliberate individual steps, but where the practice really hit home is when Franklin looked at each step in the process to identify where he was weakest in his writing process. Was it in the careful notes he took? Was it in his process of translating those notes into writing? Was it his vocabulary? His prose? What was good? More importantly, what wasn’t so good? Franklin used that to figure out where he really needed to bear down to improve his writing.

James Clear has a great beginner’s guide to deliberate practice if you want to learn more about it.

One might quickly see some practical applications in life for deliberate practice. You might use it to improve the skills you use at work, for example. It can also help you build up skills you rely on in daily life, such as cooking, and such skills can have a huge impact on your finances, because (for example) if you’re a good cook, it becomes easy and pleasurable to make meals at home which are far less expensive and just as good as restaurant meals.

Deliberate experiments Simmons’ article, however, focuses not on deliberate practice, but on deliberate experiments, which are a decidedly different thing.

Deliberate experimentation simply means that you’re constantly testing things in your life. You might test things at work, test things in your relationships, test things in your day to day living – anything.

The goal of such testing isn’t to constantly disrupt everything in your life. The goal instead is to constantly gather information about different approaches to things in your life, then evaluate which approach really is the best.

Unsurprisingly, for those who read The Simple Dollar, I am a serial deliberate experimenter. I am doing this kind of thing constantly to figure out how to improve my own life.

Deliberate experiments in the morning I’ll give you a concrete example, one that comes from my own life in the last few months or so. Lately, I have been toying with various elements of my waking routine to figure out which one produces the best results over the course of an average day. What can I do during that first hour of waking that produces the best results?

The way I’ve been testing it is by trying lots of different variations each day and then keeping track of how productive each day was and how I felt. Think of it as flipping a bunch of switches in the morning and then seeing how bright the “light” of my day is.

I’ve been varying my wakeup times on a range from 5 AM to 7 AM, as well as keeping track of when I went to bed.

I’ve been varying what I eat and drink when I get up. Do I immediately drink water? Do I immediately drink coffee? Tea? A mix of those beverages? Do I immediately eat something with a lot of protein in it? A lot of carbs in it?

I’ve been varying whether or not I meditate as early as possible, whether I do a short round of exercise, whether I stretch, and whether I do a morning review of my to-do list. The more of those things that I do, the less time I have to write before my children wake up and start the day, so that’s another thing to consider.

The thing is, as I’ve kept track of all of these variations – I’ve just been writing down my routine each morning and then evaluating my day and planning the next morning’s routine in the evening – I’ve really started to figure out some things that work for me and some things that don’t.

While I’m not quite done with everything I want to try yet, I’ve figured out a general framework that seems to produce the best days for me:
+ I wake up at about 5:30 AM – 5 is too early, and later than that seems to eat away at my routine somehow
+ I immediately pour a big glass of water and drink a bit of it, then stretch for about three minutes – touching my toes and so on.
+ I don’t exercise in the morning – I’ve learned that it makes me feel really tired and lethargic in the mid afternoon.
+ I’ll slowly finish off that glass of water while looking at my to-do list for the day.
+ I eat something small with some protein in it, like a hard boiled egg.
+ I meditate for ten minutes.
+ I then immediately start working until my children get up, mostly doing things that get me as “set up” as possible for being productive as soon as they leave for school.
+ I stop working when they get up (around 6:45, though if they’re not stirring by about 6:50 or 6:55, I stop working and wake them up myself).
+ When they leave (at about 7:30), I pour myself a cup of coffee and a cup of green tea and start working, sipping them both as I work for the first half hour or so.
+ I turn on some white noise in the background, and my work day has begun.

I arrived at that routine (which I’m still experimenting with) through many deliberate experiments and what I’ve found is that it produces amazing results in terms of the quantity and relative quality of work that I’m able to get done that day. My thoughts always start trailing off in the early afternoon, but I usually feel like I’ve managed to get a lot done and then I fill the next few hours with other tasks and I feel energized to do those, too. The deliberate experiments that led to this routine were well worth the time, because it’s led to a way to start each and every day that improves the day.

Deliberate experiments and money The thing is, you can apply deliberate experimentation to almost every aspect of your life. You just break the routine things you do down into little pieces, change up the pieces a little, and see if the results change for you.

This is particularly powerful when it comes to your spending choices. How we spend our money is an enormous space upon which we can conduct deliberate experiments to improve the effectiveness of all of the money we spend.

Here are ten such experiments, right off the top of my head.

+ Is this store brand garbage bag / toilet paper / any other household product as good as the name brand I’m already using for a lower price?
+ Is life worse enough if I don’t watch any cable or satellite for a month to make it worth the cost of cancelling it?

+ Is there a way to make dry rice / dry beans / other cheap staple ingredient into dishes I really like at home?

+ Does super-inexpensive homemade laundry soap get my clothes clean enough to be worth the small amount of effort to make it?

+ Can you find enough engaging things to do to make a money free weekend / money free week an enjoyable experience?

+ Do I save time by making a meal plan, writing a grocery list from that plan, and then going to the grocery store (which saves a lot of money) versus just going directly to the store?

+ Do I get more value (time and money invested) by spending a Sunday preparing meals in advance and freezing them as compared to preparing individual meals as I go?

+ Is there any negative impact from washing my jeans every other time I wear them if they’re not visibly dirty? Every third time? They last longer that way.

+ Do I get enough financial return to make it worth the time to do a first pass through Craigslist or a secondhand store when shopping for something? Try it both ways.

+ Can I make things work without using my car for a week? If you can, it might be worthwhile to ditch the car and rely on other forms of transportation, saving a lot of money.

You can also try such experiments in related areas, such as earning more money, applying for jobs, and being more productive at your work. Here are ten such experiments to try.

+ What strategy works best at a job interview? Intense seriousness? A casual approach? Treat each interview as an experiment to see what works best for you.

+ Are you better able to focus at work or studying if you meditate for ten minutes at the start of it? Try some sessions with it and without it.

+ Are you better able to focus at work if you drink coffee or tea or water while working? Try some sessions with each beverage option.

+ Do you get better rest if you turn off your phone an hour before bed and let it charge in another room?

+ Does a ten minute walk every hour or two improve the quality and quantity of your work when you’re working on a big task?

+ Do you feel better if you exercise first thing in the morning or after a day of work?

+ Do you feel better if you sleep in until the last minute and go to bed late, or go to bed earlier and wake up earlier?

+ How does your work change if you literally turn off email and notifications for an hour in the morning and an hour in the afternoon to focus on deeper work?

+ Do you find yourself more mentally prepared in the morning if you spend your commute listening to a thoughtful podcast or audiobook? Music? What puts you in the best mindset?

+ Do you find yourself having a better week if you spend an hour each weekend doing a weekly review and also planning ahead for the next week?

All of these things can be done experimentally. How can you really get value out of it, though?

Executing deliberate experiments Let’s say one or two of those experiments sounds interesting to you. You think there’s a chance that one of them might lead to a better average day or better financial outcomes and you want to give it a try. What do you do?

The first thing you’ll want to do is define what you’re doing now versus what you want to try changing. For example, let’s say that right now you never turn off your email, notifications, or web browser when you’re working, and you want to see if a disturbance-free hour of deep work each day at work produces better results for you. In that case, you have two different scenarios to evaluate: a day with an hour of deep work and a day without an hour of deep work. You may also want to experiment with a few variations on that hour of deep work – maybe it’s the first thing you do when you get to work, the last hour before lunch, or the second hour when you’re at work. Choose a few variations.

Then, set up an experiment. Over the course of a month or two, vary which of those options you choose on a given day. Maybe for one week you simply don’t use a “deep work hour.” The next week, you use an early morning “deep work hour.” The next week, it’s a late morning hour. The next week, maybe it’s a mid afternoon hour.

At the end of each day, take note of how productive the day seemed. Was today a pretty productive day? Try to grade it on a scale of one to ten, or use any metrics you have that measure your productivity.

At the end of the week, assess your week as a whole. Was this week a pretty good week? Jot down an assessment of the whole week, and try to give it a score on a scale of one to ten, too.

Repeat that week and that measuring system for each variation you want to try. In fact, you might want to repeat each of the weeks a few times, just to iron out any variations. After all, the more data you have, the better.

Then, at the end of your experiment, sit down with all of your notes and see which type of day resulted in the most productivity. Which one has the best average daily scores? Weekly scores? Is there one that stands out above the rest (I’m willing to bet that there will be)?

If you have a clear winner, then adopt that as your new “normal” work pattern. Spend some time hammering that into place so that it becomes the new normal. Maybe, each day from ten to eleven, you have an hour of “deep work.”

You might then want to start a follow up experiment – is an additional hour in the afternoon helpful? What about a two hour block from ten to noon? Start testing that one.

The goal here is to keep questioning how you do things and pay attention to the results. Design little experiments, run them several times, keep careful track of the outcomes, and see what the results look like as a whole after running these experiments several times.

For example, maybe you’ll start doing blind tests of store brand products versus name brand products. Fill up two blank bottles of shampoo, one with store brand and one with name brand, and then see if you can figure out if there’s actually a real difference for you. If not, then the store brand makes more sense because it’s cheaper.

Maybe you’ll try five different ways of preparing dry rice at home, just to see if you can find some rice dishes that you like. Try different methods of cooking it and different seasonings and keep track of whether you liked them or not. If you find a few you like, you’ve suddenly got a very cheap staple that you can add to your routine that reduces the cost of meals.

It goes on and on and on like this.

Personally, I generally have several such experiments running all the time in my life. I’m always trying new things, reflecting on whether they’re really better, and sticking with the option that seems to be the best. Sometimes, I find that no change at all is the best option. At other times, I’m completely surprised to find that a new approach really does work better for me.

Never stop experimenting, because experiments where you keep track of results and then, when you have a lot of results, make lasting choices based on the best results almost always lead to a better overall life. You can save tons of money. You can save a lot of time. You can have better work results in less time.

It all comes back to deliberate life experiments. I consider deliberate life experiments to be an invaluable tool in getting the most value out of your money, time, and energy, and that simply leads to a better all around life.

Good luck!

The post Deliberate Experiments, Personal Finance, and Living a Better Life appeared first on The Simple Dollar.

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Friday, November 10, 2017

The Best Payday Loan Alternatives of 2017

It doesn’t matter your financial situation: There’s almost always a better alternative to taking out a payday loan. So, if you’re facing an emergency and you need money fast, ask yourself three questions:

  • What type of expense are you facing?
  • What type of debt are you already in?
  • What is your credit score?

Depending on your answers, we’ve found three of the best payday loan alternatives available today. Each offers quick funding to cover your debt, much lower interest rates than payday lenders, and can help get your finances back on track.

The Simple Dollar’s best payday loan alternatives:

Answer Alternative
  1. Emergency costs
  2. No long-term debt
  3. Good to excellent credit score
Credit Cards
  1. Emergency costs
  2. Existing long-term debt
  3. Good to average credit score
Personal Loans
  • OneMain
  • Lending Club
  • Prosper
  1. Emergency costs
  2. Existing long-term debt
  3. Average to bad credit score
Payday Alternative Loan (PAL)

Before we take an in-depth look at each, here’s a quick overview of payday loans and lenders.

What is a payday loan?

The Consumer Finance Protection Bureau (CFPB) defines payday loans as a “short-term, high-cost loan, generally for $500 or less, that is typically due within two weeks. Basically, payday loans are designed to float borrowers that are in between paychecks but need cash fast.

The average repayment date is anywhere from two weeks to a month — or whenever the borrower gets his or her next paycheck. It’s almost always agreed upon beforehand by both lender and borrower.

Payday loans are so attractive because so little is required in order to receive one. As long as you can provide an address, proof of employment, and maybe some references, you’ll be able to take out a loan.

Instead of using FICO or other credit scores to determine creditworthiness, many lenders often use custom scores based on information aspiring borrowers provide.

But, because payday lenders don’t use traditional creditworthiness methods, they don’t assign traditional APR. These are short-term, high-interest loans that are designed to be paid back within two weeks to a month.

Whether you have good or bad credit, payday loans charge a flat rate of anywhere from $15 to $30 per $100 borrowed. Even the best payday loans average around 400% APR per loan.

But in 2013, the CFPB found that the average payday borrower remained in debt for almost 200 days. That means a short-term crisis will likely turn into a long-term debt nightmare that you’ll struggle to pay off for months.

If you don’t have the money when the payment comes due, payday lenders are likely to:

  • Send harassing phone calls and emails
  • Hurt your credit score
  • Add additional fees (on average $15 per $100 borrowed)

So if you take out $400 and you don’t have $460 to spare when payment comes due, you’ll owe even more money and receive threatening calls.

The best option for payday loans is to avoid them if at all possible.

Luckily, there are alternatives, even if you have bad credit. Here’s some options to explore based on your possible situations.

Using a 0% APR or balance transfer credit card

If you need money fast, but you’ve got average to excellent credit and a paycheck on the way, using a credit card to cover emergency costs is one possible alternative to payday loans.

It’s not an ideal choice — last year the Federal Reserve listed the average credit card APR at 12.24%. But when compared to the 400% APR on payday loans, credit cards are clearly the less painful choice.

While it typically takes a week to get a credit card in the mail, some companies — such as Discover — will ship you a card overnight (so long as you’re willing to pay the extra fees). Once you’re approved, you’ll have immediate access to your card.

If you want to apply for a new credit card, many offer an extended 0% APR period, perfectly suited for bigger purchases.

If you have existing credit card debt, however, consider using a balance transfer credit card, which offers a long window for cardholders to transfer and pay off outstanding debts.

Discover it® Cashback Match™ – 14 Month 0% Intro APR

If you know you’ll be able to pay off your credit card debt within 14 months, the is a strong credit card alternative to payday loans. The introductory 0% APR period ensures that you won’t receive any interest on debt owed for your first year of card ownership. (After that ongoing APR is 11.99% – 23.99% variable.)

As a bonus, you’ll be able to earn 1% cash back on all of your payments, and Discover will match your cash back dollar-for-dollar at the end of your first year of card ownership.

Discover it® – 18 Month Balance Transfer Offer

If you already have existing credit card debt and you’re in need of emergency funds, but you have average to good credit, consider the card. The card offers an extended, 18-month window for you to transfer and pay off existing debt. And cardholders even enjoy 0% intro APR period for their first six months on purchases.
(After both introductory periods end, ongoing APR is 11.99% – 23.99% variable.)

Both cards give access to Discover’s credit scorecard, where you’ll be able to monitor your credit score and credit history. It’s a great tool for repairing credit.

Note: Taking out cash advances on a credit card is also an ineffective alternative to payday loans. Cash advances tend to come with higher APR than purchases. Both of the above cards come with a 25.99% variable cash advance APR.

Applying for personal loans

If your credit score makes qualifying for a new credit card difficult, then a personal loan from either a bank, credit union, or peer-to-peer (P2P) lender will help cover emergency costs.

Personal loans differ from payday loans in two key ways:

  • Loans are paid back in installments
  • Loans are paid back over time

So, instead of paying back the entirety of the loan by your next paycheck, you’ll have the opportunity to make smaller payments over more time with a personal loan or payday alternative loan — which will help improve your credit score as you pay down your debt.

We recommend going to your local bank or credit union for a personal loan first, but only if you have good to average credit. A personal loan is only a good idea if you can get a decent APR. It becomes harder to get a loan from a traditional bank or credit union when you have average or bad credit. You may not qualify, or your APR may be too high to justify the loan.

P2P lenders (lenders that connect investors with borrowers directly) tend to offer more generous lending requirements than banks or credit unions, while still providing the security of paying in installments.

Each of our recommended P2P lenders come with an A+ rating from the Better Business Bureau, and offer fixed rates and payment plans.

OneMain Highlights

  • Borrowing Limits:
    Between $1,500 – $25,000
  • APR Range:
    17.59% – 35.99%
  • Term lengths:
    12, 24, 36, 48, 60 months
  • Minimum credit score:

If you’re considering a payday loan and you have bad credit, OneMain Financial may make the most sense for you.

OneMain Financial specializes in offering personal loans to those with bad credit. While there’s no minimum credit score, the beginning APR on personal loans is much higher than other P2P lenders.

If your credit’s a little on the rocky side, OneMain Financial offers both secured and unsecured loan options for borrowers. They also offer the most versatile loan term options, allowing borrowers to choose anywhere from 1-5 years to repay their loans.

OneMain Financial’s primary downside is its APR. They offer the highest APR of our recommended P2P lenders, which is likely to affect borrowers with the poorest credit. While a near 36% APR isn’t ideal, it’s still much better than a payday loan’s 400%.

Lending Club Highlights

  • Borrowing Limits:
    $1,000 – $40,000
  • APR Range:
    5.99% – 35.89%
  • Term lengths:
    36, 60 months
  • Minimum credit score:

LendingClub is the ideal choice for borrowers with decent credit who are in need of emergency funds but still have some wiggle room. (LendingClub can take up to a week to approve and fund a loan.)

They offer personal loans with solid APRs, starting at 5.99% for those with better-than-average credit.

If you have other outstanding loans, you may even be able to consolidate your debts into one loan with LendingClub’s Direct Pay. To qualify, borrowers must be able to use up to 80% of their loan to pay off outstanding debt.

Prosper Highlights

  • Borrowing Limits:
    $2,000 – $35,000
  • APR Range:
    5.99% – 35.99%
  • Term lengths:
    36, 60 months
  • Minimum credit score:

With a minimum credit score of 640, Prosper is only a strong choice for borrowers with good to excellent credit.

Prosper does business a little differently than other P2P lenders. Instead of funding loans with their own money, Prosper attracts independent investors and underwrites them. Prosper utilizes an internal scoring system based on a borrower’s past behavior, and combining it with credit history to determine a unique creditworthy grade for borrowers.

If you need your loan funded quickly, Prosper’s got one of the shortest turnaround times out there — an average of 1-3 days.

And they have a strong mobile presence, a nice perk that often goes overlooked. Borrowers can check their loan details and their FICO score on the go.

What is a payday alternative loan?

A payday alternative loan (PAL) is the ideal payday loan alternative for anyone with existing debt and average to poor credit. If your credit history isn’t the greatest, but you still need emergency funding and don’t want to take a payday loan with bad credit, consider a PAL.

A payday alternative loan is a loan backed by the United States Federal Government, and is available through chartered National Credit Union Association (NCUA) members.

They are designed to help borrowers that are either caught or about to be caught in the debt trap of payday loans. Each loan offers the following features:

  • Offers amounts between $200 and $1,00
  • Loan terms from one to six months
  • Processing fees up to $20
  • Offer lower interest rates of up to 28%

In order to qualify for a PAL, borrowers must be members of the federal credit union for at least one month. In addition, the PAL must be repaid by the payment date, and cannot be rolled over. Lastly, borrowers may not take out more than three PALs within a six-month period.

Poor credit scores don’t affect a credit union’s willingness to grant a PAL. Instead, they’re more interested in consistent income and ability to repay.

PAL APR varies by credit union. You can find and contact your local credit union here.

Considering bankruptcy

If you should find yourself unable to pay back your debts, have a poor or bad credit score, and unable to pay an emergency cost without derailing your finances, it may be time to think about bankruptcy.

Bankruptcy has a bad reputation, but if you’re in a cycle of debt that you can’t get out of, it may be the most financially healthy decision you can make.

There’s no definitive time to know when it’s right to declare bankruptcy. The only sure sign is if you know that your current situation is going to harm your financial future or that of your children.

The bottom line

Simply put: Payday loans are predatory, and it’s all too easy to find yourself trapped in a debt cycle that can last for months or even years.

If you have the ability to avoid a payday loan, do so. Seek help from family or friends, use credit cards to your advantage, take out a personal loan, or apply for a payday alternative loan. Even declaring bankruptcy may be better than taking out a payday loan.

However, if all of these options fail you, be sure to shop around for the lowest interest rates and best terms you can find. Be wary of online payday loan lenders, and never borrow more than you can repay.

The post The Best Payday Loan Alternatives of 2017 appeared first on The Simple Dollar.

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Best Life Insurance Companies for 2017

The best life insurance companies typically offer unparalleled financial strength and a few key policy provisions including disability protection and end-of-life care. In order to make sure you’re getting the best life insurance, you’ll need to shop around and compare rates. Luckily, we’ve put together a handy quotes tool to help take some of the heavy lifting out of the shopping process.

Find the Best Life Insurance Plans

Enter your ZIP code below to find and compare the best life insurance rates for you.

The Simple Dollar’s Top Picks for Best Life Insurance

  • Best Overall: TIAA Life
  • Most Customizable: New York Life
  • Honorable Mentions: Amica Life, Transamerica, Lincoln Financial, State Farm

Something else that’s important to grasp right from the get go: You should only buy life insurance if you actually need it.

I don’t need life insurance right now, but I’m going to need it soon: I don’t have any dependents and, as depressing as it is, if I were to die, everyone would be OK, financially. But, I’m looking into the future — one that’s full of kids — which means life insurance is also in the cards.

It’s no fun to contemplate the fact I could die before my kids are grown, but I want to make sure they are financially supported, no matter what. I definitely don’t (and won’t) have enough money saved to do that on my own. Even if I were a one-percenter with millions in the bank, though, life insurance would still make sense for me: It’s a way to make sure there’s some money available for them down the road.

If your death, like mine right now, wouldn’t cause a financial shake-up for someone else (your spouse and kids, business partner, special-needs sibling, etc.), then you’re better off saving your money in a 401(k), an IRA, or an index fund where it can grow faster and eventually exceed the value of a life insurance policy.

If you’re like the future-me though, and you do have someone depending on you — you need life insurance. There are two basic types of life insurance: term and permanent. I’ll discuss the specific differences between them later, but for now just know that term offers better value for the vast majority of life insurance needs (including future-mine).

How I Found the Best Life Insurance

I assembled a list of 67 nationwide life insurance companies using the Insurance Information Institute’s “Find an Insurance Company” tool and A.M. Best’s Consumer Insurance Center. After talking to experts, reading up on the industry, and scrutinizing policy details like term life insurance rates, it turned out that only six of the 67 offered all the features I’d want in a provider.

That said, I only included companies in my search that don’t have special membership requirements. There are plenty of excellent regional insurers, as well as great membership carriers like USAA, and if you’re eligible for those, you should get quotes from them too.

Last caveat: I didn’t factor in premium amounts. Of course, cheap life insurance seems better, but it’s only actually better if you have the coverage you need. Also, even if you and I both purchased the exact same policy from the same insurer, it’s unlikely we’d pay the same premiums, since there’s so much person-specific data that goes into determining those amounts. It’s impossible to evaluate a provider on their premiums alone — you’ve got to get quotes.

How life insurance rates are determined

Mortality and interest. These are the two primary factors that are taken into consideration when determining your premium rates for life insurance. Using these factors, insurers are able to put together a basic estimate of how much money they will need to pay out for death claims each year. The expense of running the life insurance company as a whole is another factor that can impact rates.

The best life insurance companies have five things in common.

They underwrite their own policies.

It turns out that not every life insurance company actually owns the products it sells. Some, like GEICO, merely service others’ policies, making them unnecessary middlemen. I don’t like the idea of an extra layer of separation if I want to change or cancel my policy. The last thing I want is for someone I love to have to jump through extra hoops to collect my death benefit, or for there to be confusion about who is cutting the check. Direct contact with the company underwriting my policy should eliminate those concerns.

There’s zero doubt about their ability to pay on a claim.

This is a no-brainer, but it needs to be said: You should only buy a policy that you’re confident will be honored when it comes claims time. Financial Strength Ratings (FSRs) from independent agencies are the best indicators of which companies will still be around decades from now. The Insurance Information Institute recommends getting ratings from two or more, and all of my top picks score high across the board. They each have at least a “Superior” (A+) rating from A.M. Best (the insurance industry’s number one rating agency), as well as a “Very Strong” (AA-) from Standard & Poor’s, or an “Excellent” (Aa1) from Moody’s. My two top picks have even higher ratings than that: TIAA and New York Life have an A++ from A.M. Best and an AA+ from S&P.

You’ll be able to renew your policy past its original term without another medical exam — guaranteed.

“Guaranteed renewability” means you can renew your term policy for additional years beyond the term limit, without being forced to take another medical exam. This provision becomes crucial if you develop a serious illness near the end of your policy’s term, since it guarantees you can maintain coverage even if no one else will insure you.

It doesn’t mean your premiums won’t go up. In fact, they will — and dramatically — for two reasons. First, you’re older, and therefore a higher risk of needing to use your life insurance. Second, the fact that you’re renewing tells your insurance company you have concerns about your health — if you didn’t, you could get a cheaper rate on a new policy with a medical exam.

If you do choose to renew your term policy, it operates on a year-to-year basis, and your premium can jump with each successive renewal. Still, for the folks who need it, guaranteed renewability is a godsend.

You can convert a term policy to a permanent one.

Even though term life insurance is the only type most of us need, there are some cases where permanent can make sense. If you start out with a term policy, but end up needing permanent coverage — to secure care for a disabled family member, say, or to offset estate tax for your heirs if you become wealthy — convertibility can be a valuable feature to have.

Similar to guaranteed renewability, the important thing here is that you can extend coverage (in this case, for the rest of your life) without having to take a new medical exam. If you’re in good health, you probably won’t ever use the option because you can qualify for a better rate on a brand-new permanent life policy. But if you’re sick, converting your existing policy could be the only way to keep your coverage in force for as long as you need it.

While all my top picks will let you convert during the first part of your term, most take the option away at some point. Among my top picks, only TIAA and New York Life allow conversion at any time during the term, another reason they lead the pack.

And, it’s easy to customize your coverage.

Since everyone’s life insurance needs are different (and can change over time), the best policies allow a high degree of flexibility in your coverage, whether standard or as a rider.

  • Cost certainty — The option for a Guaranteed Level Premium is nearly standard across term policies. The option ensures that your premium won’t rise — it’ll be the same every year of your term. Level premiums make it easy to budget, and therefore easier to keep your coverage in force since you know what you’ll owe. (That said, you do pay more in the early years compared to a policy without level premiums to offset the increasing costs of insuring you as you age.)
  • Lots of options for term lengths — Most companies offer multiple term options: 10-, 15-, 20-, 25-, and 30-year terms are common. But it’s rare to find a policy as flexible as New York Life’s; it lets you select a term that’s any number of years long from 10 to 20 years. And even though New York Life doesn’t technically offer terms longer than 20 years, the “Policy Purchase Option” allows you to start a new replacement term at specific dates without another medical exam. So, you can buy an initial term of 20 years, have a surprise baby in year 12, and replace the existing policy with a new 18-year term policy (or 19, or 20). In effect, that’d be like buying a 30-year policy, except for the fact that you’ll be older when you buy the second term, so your premiums might be higher. However, those same premiums would be based on the medical data from your first policy, which could save you significant money compared to buying a brand-new policy.
  • Few, if any, conversion restrictions — I mentioned that some companies only allow conversion during the first part of the term, so if you wind up wanting to convert in the latter half of your policy, you could be out of luck. A big reason why I like TIAA Life insurance is that in addition to allowing you to convert at any time, it also lets you convert a term policy to any of its permanent products, not just the one or two it likes best (read: the more expensive ones).
  • Disability protection — If you become disabled during your term, a Waiver of Premium Rider will forgive your premiums and keep your policy in force. While it won’t replace lost income (like disability insurance), it will at least keep your life insurance from lapsing if you can’t pay for it.
  • End-of-life care — An Accelerated Death Benefit Rider lets you draw on your policy’s death benefit to help cover end-of-life costs. It can help pay for a potentially lifesaving treatment, or ease the financial burden of hospice care, making an extremely difficult situation a little bit more manageable. Keep in mind, though, if you elect to use this option, it’ll be deducted from your death benefit.

Screenshot of New York Life Term Life Insurance

What You Need to Know When Buying Life Insurance

There are two basic types of life insurance: term and permanent.

The fundamental difference is right there in the name: Term life insurance is only in force during a set period or “term,” while permanent life insurance is yours for your entire life. So why doesn’t everyone just get permanent? Because it’s much more expensive — 10 times more than term, on average. The higher cost makes sense, since the insurance company knows it will be paying out eventually (whereas with term, there’s a good chance you’ll outlive the policy and cost the company next to nothing). However, it also means that most people can’t afford permanent life.

Screenshot of TIAA Life Insurance Education

For most people, term is the way to go.

Term life insurance is way simpler than permanent. You pay a (much lower) premium for a set period of protection, which typically coincides with your prime working years. You can think of it as insurance on the income you haven’t yet earned. The advantage is pretty obvious: You can guard against uncertainty by securing a large death benefit for relatively little money. And if you invest the money you save by not going with a permanent insurance policy, you can wind up with more cash at the end of your life than a permanent policy would’ve paid anyway (of course, the tricky thing is actually putting aside that difference rather than spending it).

But even if you don’t invest the balance of what you’d pay for a permanent policy, term life insurance still offers a ton of value by safeguarding your dependents when they’re most vulnerable. You can buy a 20- or 30-year term policy with the expectation that your kids will be able to provide for themselves by its end, and when you and your partner will also hopefully be reaping the rewards of prudent investing, not to mention Social Security and pensions. Sure, your term policy has no value once it expires, but that’s OK — you were paying for the protection.

But there are some cases when permanent makes sense.

Life insurance is all about covering need, and in some cases the need for it lasts your entire life. One example is for those with special-needs children who will always require care.

Permanent life insurance also makes sense if you’ve built up enough wealth that your heirs will need to pay an estate tax — in 2016, that bar was set at $5.45 million. Life insurance death benefits are not subject to income tax, so if you get a permanent policy, you’ll know that your heirs will have cash-on-hand to pay the estate tax. This may make even more sense if the majority of your wealth is in property or other non-liquid assets.

Permanent life insurance should never be purchased as an investment for the policyholder.

The value of life insurance is in the death benefit, but insurance companies realized they could sell more of it (and justify higher prices) if people believed it was a sound investment not only for their dependents, but also for themselves as well. As a result, permanent life policies come with a cash-savings feature that you can access during your lifetime. A portion of each premium you pay goes into the “cash value,” which earns interest over time based on how the company invests it. It sounds good, but the returns are generally low because insurance companies are obligated to invest mostly in safe, low-yield securities like bonds.

There are also limits on how you can use the cash value in your policy. You can apply it to future premiums or use it to purchase more death benefits, but you can never allow it to run out completely — that will cancel your policy. You can also take out a loan based on your cash value, but if you do, you’ll need to repay it with interest — even though you’re the one who funded the account in the first place!

As a rough example, imagine you buy a permanent life insurance policy with a $500,000 death benefit at age 55. If you leave the cash value untouched, after 30 years it might be worth in the neighborhood of $250,000. You could cash that out (and cancel the policy), but your investment wouldn’t have generated as much return as it would have in, say, an index fund. However, if you keep the policy active, the death benefit for your heirs might be double what you put in.

“Permanent life insurance is rarely a good investment for the policyholder. However, it can be a very good investment for their heirs.”
Paul Puckett
Independent Life Insurance Agent & Investment Advisor Representative

Your health and age at the start of the policy are the biggest factors in determining your premiums.

The formulas life insurance companies use to set premiums are incredibly sophisticated, but they’re all designed to gauge life expectancy, which means age and physical health are the primary factors. However, your physical health is only actually measured once, via that medical exam when you first apply for coverage. The insurance company then uses population data to project your average risk of dying over the course of the policy (and sets your premiums accordingly).

This means that the younger and healthier you are at the start of the policy, the lower your premiums will be. It’s also why guaranteed renewability and a guaranteed conversion option are so important, because they too rely on that initial health picture, which is most likely the healthiest you’ll be at any time during your coverage. The following table shows how age and smoking affect monthly premiums, based on a 20-year term policy with a $100,000 death benefit (I excluded Lincoln Financial because it requires a minimum death benefit of $250,000).

Comparison of profiles for Life Insurance quotes

Premiums tend to increase as you get older and smoking can have a huge impact as well.

Even if you aren’t required to take a medical exam, you should.

At the outset of just about every life insurance policy, the company has you take a brief medical exam to see what kind of shape you’re in (it’s basically looking for cancer, diabetes, and heart disease). But if you’re young enough, you might get the option to bypass the pokes and prods and just fill out a medical questionnaire. What the company probably won’t tell you is that your choice could result in higher premiums. Without hard medical data to prove your health, you could be regarded as a riskier — and therefore more expensive — bet for the company.

“Full underwriting (with the use of a medical exam) takes more time, but it’s likely to result in significantly lower premiums.”
Tony Steuer, CLU, LA, CPFFE
Founder, The Insurance Literacy Institute
Creator, The Insurance Consumer Bill of Rights

Your driving record and credit score matter, too.

While age and health make up the lion’s share of your premium value, there are other significant risk factors that companies weigh. If you have poor credit, or a history of traffic violations, those can drive up your premiums. Likewise, if you have a job that consistently takes you to dangerous locales, or requires a lot of flying, you might be perceived as a bigger risk and have to pay more for insurance.

You and your spouse should each buy a term policy.

If you’re the primary breadwinner in your family, with a spouse who takes care of the home, you might not have considered the real cost of replacing the work he or she does. Chances are, it’s more than you think. For the past few years, Salary.com has surveyed more than 15,000 stay-at-home moms. In 2016, it found that the 10 most frequent responsibilities (things like day care, driving, tutoring, and cooking) totaled up to a market value of $143,102 a year! This might be what you’d have to pay outside help in their absence — reason enough to buy a separate term policy.

When does life insurance work?

Life insurance policies take effect when the insured has passed away and the beneficiaries have filed a claim. This involves submitting a certified copy of the death certificate to the life insurance company holding the policy. It’s important to file a death claim as soon as the insured is pronounced dead in order to avoid complications in the review process.

Take Action

Think carefully about how much life insurance you really need.

Maybe you’ve heard that you should multiply your annual income by 10 to get your life insurance face value, but five seconds probably isn’t enough to spend calculating something so important.

First, consider your long-term debts. Do you have a mortgage that will require payments for the next 25 or 30 years? What about student loans, medical expenses, and credit card balances? If you have kids, are you planning to pay their college costs?

Then ask yourself how much it takes to sustain your household at your current spending habits.

It’s also worth considering buying a larger death benefit than your beneficiaries will need because life insurance benefits are paid out in a tax-free lump sum, and if invested, can reap a significant amount of interest even in the very first year. For example, a $2 million death benefit, if invested at a 5 percent annual rate of return, would earn $100,000/year if left untouched.

Take the cost of inflation into account, too. I really like Amica Life’s rider that automatically increases the death benefit to keep its purchasing power consistent with inflation.

Enter your ZIP code to find and compare the best life insurance rates for you:

Don’t assume you’re covered through work.

My friend and his wife are pregnant with their first child right now, and I dutifully reminded him that he should probably buy life insurance. He said he’s covered through his employer-sponsored plan at his architecture firm, but I told him not to be so sure. Most employer plans carry a death benefit of far less than you would want your dependents to have, and they’re also not portable if you switch jobs. It’s great if you have employer-sponsored life insurance, but you should probably supplement it with a policy of your own.

Do yourself a favor and work with a broker.

Insurance brokers (people who sell insurance for multiple carriers) sometimes get a bad rap because they work on commission, and if they’re slimeballs, they can push an expensive policy that you don’t need just to get a heftier cut of the action. But most brokers aren’t slimeballs, and they can be a huge help.

Brokers not only can quickly sift through hundreds of options to find the policies that best fit your needs, but also know which companies are likelier to offer you the lowest premium. How? They’ve reviewed insurance policies every day (probably for years), so they’re familiar with the specific underwriting criteria of various companies — which ones are more generous on height and weight tables, or which ones are particularly strict about driving records.

You also won’t save money by not working with a broker. Insurance companies assume a broker fee when they set their premiums, so even if you buy your policy through a website like Policygenius.com, your premiums will be the same as if you worked with a broker. The only difference is where that commission money goes.

Maybe you’ve heard that you should talk to a fee-only financial planner instead of a broker. While it’s true that fee-only advisers don’t receive commission from insurance companies, that doesn’t mean they don’t have some other arrangement that incentivizes them to suggest certain policies. Plus, a fee-only adviser only makes recommendations, leaving you to purchase the policy yourself (and pay the built-in commission).

Even though brokers are paid on commission, that doesn’t mean they won’t give you good advice. Just make sure they’re licensed to sell life insurance in your state, and they don’t have a disciplinary record. Both of these pieces of info are publicly available from your state’s Department of Insurance.

“Insurers are constantly adjusting their underwriting criteria to take advantage of trends or make themselves more competitive in a particular demographic. A good broker will be aware of recent changes that could save you money on your policy.”
Shannah Compton Game, CFP, MBA
Chief Millennial Money Strategist at Your Millennial Money

The Bottom Line

You might not think you need to look into life insurance companies, but you never know what life has in store. It’s often best to be prepared and this is especially true if you have dependents who rely on your income. Overall, we’ve found that term life insurance offers the most bang for your buck. Just double-check to make sure you’re getting the best term life insurance (TIAA Life insurance, for example).

The post Best Life Insurance Companies for 2017 appeared first on The Simple Dollar.

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Negative Emotions and Financial Self-Control

Guilt. Shame. Embarrassment.

Those feelings often drive us towards particular behaviors in our life, some positive and some negative.

We call our mom because we feel guilty that we haven’t talked to her in a while.

We skip meals because we feel shame at our overeating and our body shape.

We never invite people over because we feel embarrassment at the disorderliness of our home.

Maybe those things describe you or maybe they don’t, but I’m willing to bet that for most of you, at some point or another, has had a negative feeling drive your financial behavior.

I’ll be the first to admit that it’s happened to me, more than a few times. I’ll be feeling glum about something that’s happened in my life and I’ll convince myself, somehow, that spending money is a solution to that problem.

I’ve signed up for gym memberships because I was frustrated and ashamed of my physical fitness and then never used it enough to make it worth the cost.

I’ve gone out to eat with people because I didn’t want to bother cleaning up my own home and was embarrassed to invite people over to see the mess.

I’ve bought myself a treat because I felt sad and I didn’t want to feel sad any more.

Negative emotions have triggered a lot of impulsive, useless spending in my life. At times, it still does. It has taken me half a lifetime to get some grip on it.

So, what have I learned about negative emotions and financial self-control?

First, throwing money at a negative emotion virtually never makes it truly go away. It might pause that feeling for a little while, but that feeling comes back – and it sometimes comes back in force.

A purchase doesn’t make guilt go away. It doesn’t make shame go away. It doesn’t make embarrassment go away. Those things persist, and they’re sometimes made even worse if you simply throw money at the problem.

Second, having a toolbox of tactics to help resolve negative emotions really helps. Quite often, when that wave of negative emotion is washing over you, you want to do something to feel empowered, to take control of it. Buying something to make it go away temporarily is definitely one action, but, as noted above, it’s not the best action. It often has financial consequences.

Instead, I have a handful of different tactics that I deploy when I’m frustrated or angry or sad and that feeling leads to a temptation to spend.

I go on a walk outside, preferably in nature. Simply being in a natural environment seems to elevate my mood quite easily. It’s some combination of having nature around me and natural sunlight on my skin.

I do some intense exercise. It really doesn’t matter what I do, as long as I get myself out of breath and sweating. That’s enough to bring out a big wave of endorphins, which are a natural mood lifter.

I spend some time making something. I find that channeling a negative emotion into making something is a great way to defuse it. I’ll make an elaborate soup or a loaf of homemade bread. I’ll write a short story or make a video. The act of creating something often puts negative feelings in check without cost.

I get in contact with an old friend. I’ll simply look up a few old friends and send them a positive message. Something about that process really erases negative feelings for me, leaving me feeling like I’ve sent out a positive message into the world.

Third, a frequently occurring negative emotion probably has something causing it, and it is very much worth your time to figure out that cause. Sometimes, that cause can actually be a condition like depression, but quite often, melancholy or other negative emotions are brought on by some aspect of one’s environment or one’s regular life routine.

Spend some time figuring out exactly what’s driving that negative feeling, and then commit to alleviating that cause. Make the elimination of that cause a goal in your life. It might be a short term goal or a long term goal, but it should be something you’re working toward with daily effort.

That way, when the negative feeling comes around, you can tell yourself it’s getting better and have actual evidence for that. Over time, you may in fact entirely eliminate that negative feeling.

If your home is cluttered and messy, for example, start getting rid of stuff. Organize all the stuff you have and make a big pile of stuff to downsize, and then sell it on Craigslist. You can even just toss some of it or give it away if it’s not going to return much to you.

If you don’t like how you look, commit to a better diet and exercise regimen. Make that your main focus for the next several months. Just simply cut back on the calories and add an exercise routine to your life, and make those changes an enormous focus.

If you’re unhappy with a relationship in your life, work on it. Spend more time on it, or figure out new ways to interact.

If something is generating negative feelings in your life, make it a priority to figure out how to solve that “something,” whatever it might be. Those negative feelings are the result of your life telling you that this area needs more attention. Give it more attention.

Finally, making a routine out of preventative measures goes a long way toward keeping negative feelings from cropping up. This is a mix of tactics to keep specific negative feelings at bay along with some general tactics that can help keep you from being too hard on yourself.

There are a lot of little things that people can do to cultivate a more positive mindset about the world as a whole, and such a perspective can take the edge off of the problems that we all face, tuning them down from generators of negative feelings to minor problems.

Here are some things I do on a daily or weekly basis that really seem to help.

I keep a gratitude journal. Each day, I write down five good things that happened to me that day that I’m grateful for. It’s a steady reminder that I have a lot of good things in my life. I can always use the archives of that journal to remind me of the absolute abundance of good things in my life.

I go outside for a sustained period each day. Maybe I’ll go on a walk. Maybe I’ll work on some kind of project. Maybe I’ll go to the park and sit on a bench and read a book. I do something outside, something in a different environment that provides sunlight and fresh air.

I meditate. This one’s really simple, but it takes the edge off of anxiety like nothing else. For ten minutes, I just close my eyes and focus on my inhaling and my exhaling. If I find my mind drifting to anything else, I gently bring it back to my breathing. That’s it!

I drink lots of water. This is surprisingly effective at keeping my mood up and keeping negative thoughts at bay. I can literally feel it when I’m not drinking enough water.

I plan a social event at my house. I’m an introvert, so social events have their own kind of stress, but planning some kind of social event that’s oriented around interacting with people I care about is almost always a mood lifter. Plus, it often provides direct motivation to take care of things that would have otherwise caused negative feelings.

It is incredibly easy for negative emotions to grab us by the collar and direct our thoughts in a direction that isn’t very useful for our finances or for any other aspect of our everyday life. We can easily be steered down paths that don’t help us achieve the things we want to achieve.

Having a toolbox to deal with those feelings when they pop up is immensely helpful, and having some regular tactics that help keep those feelings from turning into a downward spiral is incredibly valuable.

If you find yourself making personal and financial mistakes due to negative emotions, consider using the tools above to find a better path forward. Your wallet and your life will thank you.

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Thursday, November 9, 2017

Struggling Against Good Decisions with Bad Results

Back in the mid-2000s, I spent a year or two playing online poker as a side gig. At that point, when ESPN was hyping poker to the moon with endless replays of the World Series of Poker, lots of people were jumping onto online poker sites and just throwing money into tournaments without any sense of strategy, which meant that almost anyone with a little bit of patience could make money doing this.

During that period, I made quite a few friends who were doing the same thing. We shared strategies, gave each other tips, and tried to avoid situations where we would take money from each other, preferring instead to take it from all of the people who were playing foolishly.

In 2006, I began to see the writing on the wall with regards to online poker, so I cashed out completely and dropped out of the scene. However, a few of those friendships persisted. A couple of those friends were playing poker full time and eventually they moved to Europe to keep playing, both online and in casinos.

As time went on, most of those friendships faded away, as friendships do when lives go in completely different directions, so it was really nice to get an email a few weeks ago from one of my old poker buddies. He no longer plays, either, but he kept with it for years after I gave it up and his winnings helped put him into a very good financial place for a while. Today, he’s actually back in school, trying to get a degree in statistics, because he always enjoyed the mathematical analysis part of the game the most.

We swapped some emails, catching up with each other and reminiscing about the good old days, and we got on the topic of how our poker playing actually helped with our day-to-day lives.

He sent me back something that I want to quote here with a little editing (I edited out some flavorful language and touched up grammar and punctuation), with his permission:

More than anything poker helped me to trust in what the right move was even if the result was a bad beat. You can’t look at just a few hands and let that justify your play. If you do that you’re on tilt and you’re just going to cough up money to people. Sometimes bad beats happen and that doesn’t mean your strategy is bad.

I witnessed this countless times when I was playing online poker, and I even fell prey to it a few times myself.

You’d play the game according to a really sensible strategy, based on math and statistics. That strategy, over the long haul, is pretty obviously a good one. My pet strategy at the time was to fold everything that wasn’t an absolutely amazing hand, so I’d actually fold 98% or 99% of my hands. Doing that alone at the time was often enough to push me right into the moneymaking part of tournaments. I would have tournaments where I would literally do nothing but pass and still make money from them.

That strategy worked, over and over again, but there were still times when it would fail. I’d be handed two aces, see another ace turn up, and bet in a perfect way to get someone else to start betting, which will win me the hand 95% of the time — but then the other guy will have an ace as well and have a better kicker card.

The thing is, if you play cards enough, those kinds of bad results will happen in pairs or triplets, or they’ll happen at a key moment to cost you a fair amount of money. It happens. That’s simply part of poker. However, those bad results will sometimes result in a losing streak, and that losing streak will make you start second guessing everything.

When you start second guessing everything like that, it’s time to quit. It’s time to leave the table and get a breather and calm yourself down, because you’re starting to react to a numbers game with emotion, and that’s virtually a guarantee that you’re going to make bad decisions.

Even worse than that, sometimes you’ll make a bad decision right after a series of good decisions with unfortunate results, and that bad decision will have a statistically unlikely great result. You go all in on a junk hand and somehow the cards flip and you somehow win. At that point, you’re playing completely without principles and you’re emotionally and mentally primed to go on a giant losing streak.

Whenever you’re doing something where you’re dealing with likely but uncertain outcomes, like poker or like life, there are times when making a good decision is going to have a bad result. You can play poker perfectly or close to it, but sometimes you’ll still go bust. The danger comes in how you respond to that event, which will happen sometimes.

Here’s another way of thinking about what he’s saying, in more of a personal finance context.

Imagine you’re in a place, much like I was in circa 2006, where you’re struggling to get your financial head above water. You follow all the advice. You start an emergency fund. You spend less than you earn. You start to pay off a credit card. Things are going great for a few months.

Then you wake up one morning and your car won’t start. You have to get it towed to a repair shop where you’re hit with a $100 towing bill and a $1,400 repair bill. All of your financial progress of the last few months is gone.

What do you do?

A lot of people respond to that situation by buying into the notion that it is impossible to get ahead. They look entirely at the “bad beat” of that one car repair bill and how it utterly depleted their “stack,” and they think that their careful play of the last few months was a waste of time. After all that slow effort, they’re still stuck with a small stack. They’re not getting ahead, so, clearly, that strategy must be wrong.

So, they revert back to awful financial behavior. If good financial behavior doesn’t get them ahead, they think, they might as well spend it while they’ve got it. They blow through that emergency fund. They run that credit card back up. Even worse, they’re somehow angry at “the system” because they can’t ever get ahead.

In essence, they go on “tilt” against their day-to-day financial life.

Consider this scenario as well:

Your financial life is finally stable, so you decide to start investing for the future. You understand the reasoning behind investing – you put away some money now, it grows at a faster rate than inflation, and in the future you have more value than you started with. So, you start putting money into retirement and into other accounts.

Two years later, the stock market has another 2008. You lose 40% of the value of your investment in just a few months. A good third of the money you put aside is gone.

What do you do?

For people who aren’t active investors and who just want to put money aside for retirement, the well-established best strategy is to find a low-cost diverse index fund and put your money in there regularly, not touching it until you’re close to retirement, and ignore the ups and downs of the market.

Even knowing that, however, many people still react to a market downturn with panic. They see their investment losing value and rather than reacting with calmness and understanding that sometimes the market does drop in the short term, they instead sell at or near the bottom to “save what they have.” The only problem is that they tend to lose out on a ton of gains on the rebound and just lock in the losses that have already happened. Emotion undermines principles, and when that happens, things tend to work against you.

When people do these kinds of things, they’re actually making a number of mistakes at once.

First of all, they’re basing their conclusion about financial principles on a very small set of data points. If you’re making broad conclusions about your life habits on the basis of a pretty small number of events, you’re very likely to draw some poor conclusions. If you’re making strong financial choices for just a month or two, you’re really only looking at a healthy handful of data points, which isn’t really enough to indicate one way or another whether those moves make sense.

Second, they’re ignoring the advice of people who have actually looked at a lot more data points. The people that preach “spend less than you earn,” like myself, are typically looking at their lives over the course of years or even decades, and have often looked at how that principle has affected other lives as well. They’re basing that principle on a lot of data points.

Third, they’re also ignoring what their scenario would look like without following those financial principles. The principle of “spending less than you earn” has very little connection to a car breakdown. It’s extremely likely that such an event happens anyway, regardless of your financial choices. Stop for a moment and consider the impact of such an event without having spent a few months committing to spending less than you earn. Rather than being something manageable, it would be a complete disaster.

Finally, they’re adopting an alternative strategy that lacks any sort of core principle. Much like a poker player who’s on “tilt” and keeps going all-in on pretty much any hand, a person who regresses to terrible financial behavior is operating on emotion without any core principles guiding them. Over the long haul, actions that aren’t guided by principles are going to result in disaster.

So, what’s the solution here? How exactly can a person handle bad outcomes that follow good decisions without making things even worse?

Here’s how.

Have Bedrock Principles and Stick to Them

Over the long term, the principle of spending less than you earn and putting aside the difference for unexpected events in the future simply works. It ensures that those unexpected events have minimal negative impact on your life. It ensures that, over time, you’ll be impacted less by things like interest rates on debts, late fees, and so forth. It ensures that eventually you’ll be able to start investing money to start working for you. Those are the inevitable outcomes of a principle of spending less than you earn.

There are many other similar principles you might adopt, too – the “spend less than you earn” one is just a very foundational principle. You might have a principle of always trying the store brand first and sticking with it if it works. You might have a principle of never eating out while alone.

The goal is to have rules to live by, that govern your actions in a variety of situations and that you better have a very, very good reason for not sticking with them.

Find those principles. Make sure you understand them inside and out. Why do they work? How do they work? How do you actually execute them? If you understand your principles deeply, they become almost foregone conclusions in terms of how you behave. In essence, they become automatic.

How do you find such principles? Read. Pay attention to your life experiences. Listen to wise people. Translate those things you learn into clear principles that you can live by.

With finances, just read lots of sources. I’m proud to think that The Simple Dollar might be one of your sources, but it shouldn’t be the only one. Read books on finances. Look for the common threads that keep popping up and the really straightforward strategies that just make a ton of sense for you. Turn them over in your head until they become well-worn and integrated into your thinking. Actually follow those principles, over and over again, in a wide variety of specific situations.

Understand That Good Principles Are Just More Likely to Have Good Results, Not a Guarantee

The thing to remember about a good principle is that it doesn’t guarantee a good outcome. All it does is ensure a greater likelihood of a good outcome than not following that principle. Over a lot of opportunities, it becomes more and more likely that you’re going to be in a better overall place because of that principle, but there will be times where you don’t get the good outcome you expect.

Spending less than you earn is a great principle that over a given period of time vastly improves the chances that you’ll have a higher net worth and less debt, but it doesn’t guarantee it. Sometimes, emergencies will happen. Sometimes, your car won’t start. That doesn’t invalidate the principle.

Buying store brand items first and sticking with them if they work is a great principle that ensures that you’ll save money on a lot of your purchases, but it doesn’t guarantee it. On rare occasion, you might buy a store brand item that turns out to be unusable for some reason – product failure, allergies, and so on. The occasional “dud” product doesn’t invalidate the principle.

Practicing good social behavior and starting polite conversations with people is a great principle that ensures that you have a much better chance of building a good relationship in a room full of people, but it doesn’t guarantee it. Sometimes, you might start talking to someone who is just unfriendly. Sometimes, you might say the wrong thing at the wrong moment. Those occasional bad results don’t invalidate the overall principle.

Good principles are never guarantees. They merely increase the odds of an outcome that you’ll like. If you expect guarantees in life, you’ll be disappointed time and time again. Instead, you should simply search for good principles that provide a greater likelihood of the outcomes you want, and live by those principles.

Consider What Life Would Be Like If You Never Had the Principle at All

When you see a short term run of bad outcomes from good decisions, such as a period when the stock market tumbles or a period where a bunch of unexpected events drains your emergency fund or puffs up your credit card balances, it can be really tempting to abandon those good decisions.

But simply step back and consider for a moment where your life would be if you had never made those decisions.

If you didn’t choose to commit to spending less than you earn, you wouldn’t have had the emergency fund or the breathing room to make paying for that series of unexpected events. Yes, you might be “back where you started” with regards to your emergency fund or your credit cards, but where would you be if you had never saved at all? It wouldn’t be good, would it.

If you hadn’t been investing at all, you wouldn’t be holding a ton of investments that have now gone through a correction and are poised for a long positive run. If you hadn’t changed things around so that you could afford to easily invest, you would have never caught the bottom of this market and you wouldn’t be able to ride the elevator up all the way from the ground floor. You are in far, far better shape than if you had never invested at all, and you’re poised for tremendous returns in the coming years.

The thing is, whenever you’re living by a good principle and you step back and look at the whole impact of that principle on your life over a longer period of time, you almost always find yourself with a rather large net positive in your life, one that would not exist if you didn’t stick to your principles.

Here’s another example: I might sometimes go to a community event, talk to a bunch of people, and find that none of them click at all with me and one or two seem to actively shy away from me for whatever reason. That could be used in my head as “proof” that the principle of being social and trying to build relationships at community events is a bad one, but if I step back and look at a broad view, I see that I’ve made a lot of connections over the years by just having the courage to talk.

If your principles are sensible bedrock principles that you trust and that you’ve seen have great results in the past, stick with them even in the tough times. Good principles aren’t about perfection, but about simply having a better average outcome than other ways of doing things. You’ll still fail sometimes, and that’s okay, but over the long run, you’ll see far more success with a good principle. When you’re in doubt, step back and look at that long run.

Final Thoughts

It is very easy to step into a mindset of not trusting your principles when you find yourself on a losing streak at life. The thing to remember is this: principles really matter over the long term, not the short term. If you have a lot of situations in your life where your principles come to the surface, you’re going to eventually have some streaks where your principles do not result in the desired outcome.

Think of it this way. Imagine that life is like rolling a six-sided die, like at a craps table. If you just bumble through life, you might find that you only succeed when rolling a 5 or a 6, and a 1 through a 4 is a failure. On the other hand, if you adopt a principle, you might change the game a little – now a 4, 5, and 6 are successes and a 1, 2, and 3 are failures.

If you roll that die 1,000 times, you’re going to find that there are periods where you keep rolling 1 or 2 or 3. You have big runs of failures. It can seem like your principle fails you. However, rather than looking at those streaks, look instead at the results over 1,000 rolls. You’re going to have way more success over the long run by sticking with principles.

Find good principles. Stick with them. Step back from losing streaks and look at the big picture.

You’ll be glad you did.

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Seven Chronic Financial Problems That Money Won’t Solve

If the world and the people in it were simple and sensible, hardly anyone would struggle with money. Families with debt would take rational steps to pay it off slowly, starting with debts at the highest interest rate. And since we’d all know exactly how much we earned (and thus, what we could afford), we’d spend less than that – while also saving plenty of cash for fun and the future.

Unfortunately, humans are rarely rational, and modern life tends to complicate our finances no matter our intentions. It’s hard to stay out of debt when everyone you know makes more money than you do, for example. And paying off debt often means going without, a difficult feat when you’re not accustomed to sacrifice.

But, our financial difficulties don’t end there. While plenty of people struggle with money due to their poor financial decisions or disorganization, there are others who suffer from chronic conditions that make it considerably harder to get ahead.

“Money disorders are patterns of chronically self-destructive behaviors that are not fixed by having more money,” says Dr. Brad Klontz, a certified financial planner and associate professor of financial psychology at Creighton University. For those suffering from a psychological condition, it’s possible that no amount of money will help them dig out – and more money can even make matters worse.

But, what are the conditions that plague so many people trying to get their financial acts together? Klontz says gambling, compulsive buying, and hoarding disorders are among the big ones:

#1: Gambling

Chronic gambling is a persistent and problematic disorder that affects as much as 5% of the population at some time in their lives, notes Klontz. Those who have a gambling disorder have difficulty controlling, stopping, or reducing their gambling. They may hide their gambling from family and friends, and they may need to gamble more and more to keep things exciting.

Some of the worst cases involve situations where a chronic gambler engages in illegal acts (e.g., stealing, extortion, etc.) to fund their chronic gambling habit. Obviously, this kind of behavior takes their addiction to another level, both because it raises the stakes and because it adds a criminal element to their behavior.

“Pathological gamblers often gamble as a way to feel better about themselves and as an escape from their problems,” notes the Klontz Money Behavior Inventory (KMBI), a money wellness test he offers on his website. “Like other addictive and compulsive behaviors, however, untreated pathological gambling can have devastating effects on one’s relationships and life-satisfaction.”

#2: Compulsive Buying Disorders

Compulsive buying is another chronic condition that afflicts more than 5% of Americans. This condition is worse than just having the urge to shop every once in a while; compulsive buyers actually experience irresistible impulses to buy along with complete loss of control over their shopping and spending.

The thing is, this issue is often much deeper and more complex than we realize. While spending addiction appears to be a financial problem, the root cause of the issue has nothing to do with money, says licensed psychotherapist Ginger Dean of Girls Just Wanna Have Funds.

It’s “simply a symptom of a larger emotional problem, and money can’t be used it fix it,” she says. And since spending is used to ease discomfort caused by emotional pain, overspending can be cyclical, happening over and over again.

According to Dean, symptoms of spending addiction include shopping compulsively during periods of high stress, buying items you don’t need to keep the “high” going, buying items you know you’ll return later, and buying items for the sole purpose of impressing others.

Klontz’s research notes that chronic and compulsive buyers typically wind up feeling shame, regret, and guilt after making purchases. However, they often pick up where they left off, starting up yet another shopping binge to ease their pain. Klontz says compulsive buying is a serious money disorder that is also associated with anxiety, depression, low self-esteem, eating disorders, and substance abuse as well.

#3: Hoarding Disorders

We’ve all seen or at least heard about the television show Hoarders on A&E by now. If you haven’t, picture seemingly normal humans who live in barely inhabitable homes filled with trash and random belongings. While some of the individuals confess to being “collectors” of sorts, others just can’t manage to throw things away. Regardless, most of the people who suffer from this condition struggle to live a typical life or have regular social interactions with friends.

Klontz and his team have conducted research that shows that hoarders are emotionally attached to their possessions. They have trouble deciding what to keep, what to get rid of, and how to organize the possessions they have. They may also have a miserly spending attitude toward themselves or others, and may struggle to discard anything as a result – even trash.

Unfortunately, there are health risks that come with hoarding, such as fire hazards, falling down, and unsanitary conditions. Ultimately, hoarding can also take a financial toll as well, since constantly accumulating more items can be a costly habit on its own.

#4: Financial Enabling

We all have that friend who is too generous for their own good. They put themselves in financial peril to help someone else with money, and they have trouble saying “no” to financial requests from children, family, or friends.

According to Klontz and other experts, this is known as financial enabling. Those who suffer from this condition tend to put themselves at risk either through intense generosity or by loaning money with no clear arrangements on how it will be paid back.

While financial enablers tend to act out of the goodness of their hearts, they typically wind up feeling resentful and angry about their situation. They may feel taken advantage of, or as if others don’t appreciate them. Unfortunately, this rarely stops their behavior as they continue giving to others regardless of their own financial health.

#5: Financial Dependence

Financial dependence comes in many different forms, but usually entails dependence on a partner, parents, or even the government or a trust fund. But financial dependence is more than just not wanting to work; it’s when someone suffers from such low self-esteem and feelings of incompetence that they no longer feel capable of supporting themselves.

There are obvious financial downsides that come with being dependent on a family member, partner, or third party for your livelihood, including feelings of anger and resentment and continued low self-worth.

What Causes Chronic Financial Issues?

According to Klontz and his research at Creighton University, “money scripts” are strong predictors of financial behaviors. Money scripts are the typically unconscious beliefs we have about money that we develop in childhood. While some of us learn positive habits from money scripts, not all of us do.

“For individuals who find themselves in a pattern of chronically self-defeating behaviors, it is important for them to examine their money scripts and where they came from,” says Klontz. He and his partner offer a Money Scripts quiz you can take to see what you learned about money during childhood, and how those lessons carry through to how you handle money today.

In addition to money scripts, a lot of chronic money issues seem to stem from low self-worth. “Low sense of self-worth is often the issue because money is related to high status, and people struggling in this area often use money to feel better about themselves,” notes Dean.

Dean offers the example of two friends, Amy and Tina, who compete for attention and status based on their purchases. Let’s say Amy’s husband bought her a new Mercedes — so Tina, who suffers from low self-worth, immediately goes out and buys a new BMW a few days later. If Tina can’t afford the payments, she may have to return the car or face the financial implications of defaulting on her auto loan or having the car repossessed.

“The issue there is the impulse purchase that happened in response to feelings of jealousy and inadequacy, which are rooted in low sense of self-worth,” says Dean. “People with a chronic low sense of self-worth often feel deep emotional pain and even physical pain. In response to wanting to ease this pain, a spending addiction is born.”

How to Manage Chronic Financial Issues

Obviously, there are other issues that lead to chronic financial problems. Addiction and abuse, for example, tend to bleed into all aspects of our lives – including our finances – over time if left untreated. Unfortunately, just knowing where your issues stem from may not be enough.

At the end of the day, you may need to reach out to a third party if you’re struggling to find balance with your spending or can’t seem to overcome your issues. Dean says many people wrongly assume a self-help book will fix the issue, but that the DIY approach rarely scratches the surface. At best, reading a book or watching a documentary will do nothing but “provide some psychoeducation, feel-good platitudes, and light coaching around the issue.”

“See a professional,” she says. “This is a process or behavioral addiction that needs to be treated by someone who specializes in this area.”

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

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Have you ever struggled with a chronic financial issue or known someone who has? Please share in the comments below. 

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