Seven Money Mottos to Live By
1. Spend less than you earn
You have undoubtedly heard this before. It’s probably the most cliched statement in all of personal finance. But do you adhere to it? Short of winning the lottery or inheriting sizeable wealth, the only way to get ahead and stay ahead of your money is to spend less than you earn. It’s basic math. The rest is just commentary.
2. Pay yourself first
When you are setting your monthly budget (you do have a budget, don’t you?), include a category for savings. And make sure that before you pay your bills, before you buy your groceries, before you buy a slice of pizza, a new outfit, a toy for the baby or do anything else, you set aside a portion of your income for savings. The first bill you pay each month should be to yourself. If you wait until the end of the month to save what’s left, there will be nothing there. Establishing an automatic savings plan is a (nearly) painless way to pay go. You learn to live without the money. It’s like it was never there. So start the savings habit now.
3. Invest you must
Money is like a muscle. Perhaps you never thought about it like that, but it’s true: just like a muscle loses strength and atrophies when you don’t use it, so too, money loses its purchasing power when not used, or invested, properly. If you stash your cash under the mattress or park your money in a bank deposit, inflation will take a big chunk out of your future wealth. So, invest you must.
Before you begin, figure out why you want to invest – to fund your retirement, to marry off your children, to buy a larger house? Ask yourself some questions: When do I need the money? How much will I need? How much risk can I tolerate? Can I stomach seeing my investments lose money? Can I manage the investments myself or do I need an expert to help me? What happens if I don’t meet my goals?
Next, create an investment plan to help you reach your goals. Many investors fail because they don’t have a strategy. They run around like unguided missiles chasing the latest investment trend. You need a solid investment plan that matches the assets you buy with your unique personality and your personal financial goals. If you have little experience or feel uncomfortable swimming in the financial ocean, you may need some help to clarify the issues and to get you on your way.
4. Time is your friend
Experience the magic of compounding! Compounding is what happens when the money you invest earns interest and increases in value over time. The increased amount is reinvested to earn even more. Over time, as your wealth continues to grow, compounding plays a central role, increasing your wealth exponentially. The longer your money is invested, the greater its chance to compound. Given enough time, even small investments can grow to impressive amounts.
Time is also a great healer. When we talk about investing, time enables you to weather downturns in the financial markets. Although past performance doesn’t guarantee future results, stock investments have historically provided the highest long-term returns. But they also carry the greatest risk, sometimes declining by 30% or 40% or more in a single year. Younger investors typically have time to ride the waves since they are further from retirement. But even older investors, with a life expectancy of 80 or 90 years, would be well suited to include stocks as part of a diversified investment portfolio.
5. Impulse is your enemy
Poor decisions are made in the heat of the moment. Think about shopping with an overtired, hungry two-year-old having a melt-down in the middle of the store: Do you buy her that toy or not?
Investors as a group are the same way: they react in the heat of the moment. When the markets are in a tailspin and chaos swirls around them, people panic and retreat – often selling their investments near the bottom of the market. The same holds true when markets are moving the other way: investors feel renewed confidence. They hear how much money everyone around them is making and they jump on the bandwagon, often near the top, thinking the trend will continue forever.
This erratic behavior has devastating consequences for the long-term performance of our investment portfolios. Studies by Morningstar and others show that real-life investor returns underperform the real-life investments in which they have invested. Conclusion: stop trying to time the markets; stop making impulsive investment decisions. Take the time to develop a solid investment plan and develop the discipline to stick with it.
6. Keep it Simple
Investors are frequently enticed by the possibility of high returns and hopes of getting rich quick. They invest in risky and esoteric assets offered by high-priced money managers and sellers of investment products. Few, if any, understand how the returns on these assets are calculated. If nothing else, they are guaranteed to make the investment managers rich at the expense of their clients.
What’s the alternative? K.I.S.S. Keep it Simple… Umm… Sweetheart. Most investors will be well suited by owning a mix of low-cost mutual funds designed to replicate the returns of the broad financial market. Some stocks, some bonds, perhaps some commodities and real estate. That’s it. Nothing fancy. We call this passive investing. It requires a small investment of your time coupled with tons of self-control. If followed closely, you have at least a 70 percent chance of outperforming any given financial pro over an extended period of time.
7. Overcome Your Money Demons
I’m sure you have found all my tips in this article to be straightforward common sense. Does that mean that you are going to apply them to your personal finances? Not necessarily.
If you know that you are procrastinating about taking these steps, you are not alone. Even smart, savvy high earners can have a tendency to overspend, invest rashly and suffer from anxious nightmares about their financial future.