Stick to the Basics
My sons recently discovered a photo album of pictures from my high school and college years. As we looked through the pictures and joked about my wardrobe choices, I was struck by how far away those times feel and how fortunate I have been to have gotten many critical life decisions right along the way. I was also reminded that I often felt as though I was flying blind when I made those decisions and how getting those decisions right seemed to have more to do with luck than intentionality.
Twenty years later, I now spend a lot of time thinking about how to help my kids make good life choices. I recognize now that while luck or providence may have played a role, it was largely the foundational principles my parents instilled in me that helped me make good decisions. “Love your neighbor”, “always do the right thing”, “always tell the truth”, “respect authority” – these are the same fundamentals that I want to inspire my children to live by. If I can do that, I’ll rest a little easier knowing that they’ll have what it takes to make good decisions in any context.
Similarly, I think we can experience a similar peace of mind when we apply the idea of principle-guided decision-making to our finances. We are constantly pummeled with “news”, most of which is negative or makes us feels as though we’re not measuring up, and it’s become increasingly more difficult to make financial decisions confidently. We have an endless number of “solutions” available – the product du jour to salve the feelings of fear or greed brought on by the noise around us. Our best bet in navigating this landscape is start with a solid foundation constructed of basic truths and then build a framework for decision-making from there. Here are a few “cornerstone” ideas to get you started:
Shut out the noise. The media is in the business of selling entertainment. Tune out the talking heads, set your goals appropriately and then don’t futz around. Over-trading, market timing, and other bad investor behavior most often destroy DIY investors’ returns.
How much you keep matters more than how much you make. When you minimize taxes, reduce costs, and keep your asset allocation steady, you are likely to see higher returns over the long term.
Save more, spend less. There’s no surer way to building wealth. If your income is $150,000 per year, and the balance in your account is $200,000, and you continue saving 10% per year, you’ll end up with about $917,000 in 20 years, assuming a 5% return. But if you increase the 10% you’re saving now by 1% each year until you reach a maximum of 16%, you could end up with $1.2 million.
Liquidity matters. It doesn’t matter how much money you have if you can’t get to it when you need it. Maximize your flexibility and ability to handle setbacks by staying out of debt and maintaining an adequate cash reserve.