By: Laura Walton AFC®
We all have plenty to worry about these days – a pandemic, social unrest, economic uncertainty and now a fire burning in our beautiful Catalinas. Yesterday, in a final meeting at the two-year mark with a participant in the 3rd Decade program he asked “what should I be reading, who should I follow, what can I subscribe to?” We want you to keep learning and there are good resources out there but now’s not the time to make managing your finances complicated. You’ve learned the basics through the 3rd Decade program, apply them and free up bandwidth for other priorities. In other words, Keep It Simple and Straightforward.
This is a basic design principle. The original acronym (Keep It Simple Stupid) was first coined by a Lockhead engineer, Kelly Johnson, as a design requirement for military equipment: whatever they designed had to be something that could be repaired by a man in the field with some basic mechanic’s training and simple tools. If not, the equipment was destined for obsolescence.
And that applies to managing your finances. Gather too much information, make it too complicated and you’re in danger of never even creating a plan much less implementing it.
I’m going to blend information from a Barron’s article, “10 Principles of Financial Proficiency”, the book, The Index Card, and the teachings of the 3rd Decade program to make it ‘simple and straightforward’.
- Can you save?
- You need to know how much you spend and on what – what you can measure you can manage. Your goal is to discover if you can save and, if so, how much. If you aren’t able to save, look at how you might increase your income and take a hard look at how you can reduce your spending. Per the Barron’s article, the average family wastes 16% of their income on unnecessary expenses. Ironically, saving 15% is the traditional recommendation – not always possible but reducing waste just might get you there!
- Be strategic with your savings
- Build an emergency savings account of 3 to 6 months of basic living expenses. This money can be held at an online bank to take advantage of market interest rates. A by-product of online banking is keeping it out of sight and out of mind as it grows.
- Pay off high-interest debt, i.e. credit cards. Check out a debt snowball calculator and get motivated when you see how much interest you can save by prioritizing the highest interest rate debt.
- Earn your employer’s match. Contribute at least enough to your employer’s retirement plan to earn their match, otherwise known as ‘free money’.
- If your employer’s plan has an option to automatically increase your contribution by 1% each year, take advantage of it. You’ll never miss the money.
- Open a Roth IRA. This is especially important if your employer doesn’t offer a retirement plan – this you can do on your own.
- Automate everything you can
- Set up automatic transfers from your paycheck to your emergency savings account, automatic transfers to fund your Roth IRA, etc. This is Warren Buffett’s #1 Rule of Saving, “Don’t save what’s left after spending; instead, spend what’s left after saving.” If you do nothing else, do this!
- Keep your investing decisions simple
- Use low-cost index mutual funds. For starters, Target Retirement Funds based on your anticipated date of retirement are a good choice. Their allocation of stocks versus bonds is continually rebalanced (you don’t have to fuss with it) and they’re set to match the appropriate risk for the number of years between now and your retirement.
- Because you’re 30-40 years from retirement, market declines are your friend. As you make your monthly contributions to your retirement accounts, in a down market you’re buying more stocks at a lower price – a bargain!
- Make sure your retirement account and Roth IRA funds are invested. Quite often we find they are sitting in low-earning Money Market accounts instead of the mutual fund(s) of your choice.
- Manage risk
- Are you adequately insured? Review your auto and homeowner or renter’s insurance regularly, preferably with an independent agent. If others depend on your income, include term life insurance coverage. Consider disability insurance.
- Get unbiased advice
- For major financial decisions, i.e. buying a home, changing employers, saving for a child’s education, etc. get advice from a fiduciary, a financial planner who commits to putting your interests ahead of his.
- Look for well-respected designations, i.e. CFP® Certified Financial Planner, and review their professional history at FINRA.org.
Yes, please keep learning about personal finance and investing but, at the same time, please don’t overthink it. Instead, the 500 words you just read will get you well along your way to financial security. It’s simple and straightforward…keep it that way!