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It may be old age creeping on, but I seem to increasingly find my financial advice advocating moderation — a balance between two more extreme courses of action. The following are several examples:
- Personal budgeting. I’ve been known to be an obsessive planner, but I don’t actually have a household budget. I take more of a big-picture approach — I only make a certain amount of money available in my checking account, and I keep my spending within that limit. If I started to bump up against that limit, perhaps I’d have to get out a sharp pencil and decide which expenses could stay or go, but I think working within a strict limit has forced me to summarily dismiss the idea of expenditures that would conflict with that limit. This has worked out to be a good saving strategy. After all, when people budget, they tend to come up with a list of things they need or want and then figure out how much they will spend on them. That approach seems to presuppose that you will get all those things. If you start with a limit that forces the rest of your income into savings, you may have to make do with a shorter list of expenditures, but you’ll have a larger savings account in the long run.
- Bargain hunting. I focus my bargain hunting on big-ticket items and on recurring expenses, because these are the things that will make the biggest difference. I do not spend as much energy hunting nickel-and-dime bargains. Just after college, when I was very poor, I remember walking an extra mile to go to a store where macaroni and cheese was 6 cents cheaper than at a nearer store. However, I think one of the rewards for earning a better living these days is being able to relax about shopping tactics that yield minor rewards.
- Tax strategy. My accountant gets a little grumpy about the fact that I don’t track my business expenses in detail. The reason? I know those expenses don’t add up to much. I think if I tracked everything throughout the year, I might save $25 or so in taxes. I will gladly pay that $25 in order not to have to keep a painstaking log. I certainly take my bigger deductions and avoid unnecessary tax liabilities, but my idea of moderation is drawing the line at things that just are not worth the time.
- Asset allocation. One school of thought is that asset allocation should be set based on your investment goals, and that you shouldn’t deviate from that policy allocation lest you be out of the market — or too heavily in the market — at the wrong time. At the opposite extreme, market-timers claim to be able to enhance returns by avoiding bear markets, but this approach can easily have the effect of magnifying risk rather than return. I believe that there is room for varying asset allocation according to market circumstances, but you should have parameters — say a 20- or 30-percent range — within which those allocations are maintained.
- Fiscal politics. I still laugh about the Laffer curve — not the idea itself, but the way it tends to be misapplied. Anti-tax advocates like to talk about the part of the curve that demonstrates how tax revenues will actually increase as tax rates are lowered, because there will be greater earning incentives and more money staying in the economy. What they don’t tend to mention is that there is a point where this process reverses, and lower tax rates start to yield lower revenues. After all, a zero percent tax rate would yield zero revenues. The tricky part is finding where the optimal tax rate is. Unlike some European leaders, I’m quite sure that optimal rate is below 50 percent; but also unlike anti-tax advocates, I’m guessing that the optimal rate is closer to 50 percent than it is to zero.
Probably the only area of finance where I don’t represent the middle ground is with regard to debt. Whether it is the government or individuals, the routine increase of indebtedness over time is a dangerously unsustainable habit. Unfortunately, the marketing of credit cards and loans is big business, and the Federal Reserve has actively sanctioned increased borrowing by lowering interest rates.
The result? Earlier this year, total consumer credit passed the $3 trillion mark for the first time ever. You have to wonder how many people who criticize our huge government deficits — which are certainly outrageous — have out-of-control credit card balances and other debts themselves.
So, a reasonable and moderate viewpoint would be that personal debt is okay as long as you can meet your payments. However, when you see how that attitude has mushroomed into $3 trillion in consumer debt, perhaps it’s time for individuals to take a less tolerant approach to their own borrowing.
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