From Here to Financial Happiness

Day Sixty Eight Negative Bonds

When we think about our money, we tend to engage in so‐called mental accounting, viewing our paycheck, portfolio, house, car, and insurance policies as separate financial buckets. But in fact, all these different financial buckets are related to one another, and we make smarter choices when we see the connections between them. One connecting thread: Many parts of our financial lives look like bonds.

A bond is an investment that pays us regular income. But we can potentially get regular income from many other sources – not just bonds but also from our employer, certificates of deposit, savings accounts, Social Security, and any pension and income annuities we have. We should factor this into our portfolio's design.

For instance, during our working years, we have less need to own bonds – because we have a paycheck to provide us with regular income – and instead, we can take the risk of keeping our portfolio mostly in stocks. Similarly, if much of our retirement expenses will be covered by Social Security and a traditional pension plan, we might allocate less to bonds and continue to hold a stock‐heavy portfolio, even after we quit the workforce.

That brings us to a simple but powerful idea: In addition to all these bond lookalikes, we may have a large position in “negative bonds,” thanks to our mortgage, student loans, credit card balances, car loans, and other debts. While bonds pay us interest, these debts charge us interest – and the interest ...