How many pieces of “advice” have you received about your finances?
- Buy XYZ stock!
- Save more money!
- Invest in your 401(k)!
There is no shortage…
Recently, I’ve been thinking a lot more about what I’m calling the “80/20 Rules Of Personal Finance.” In fact, I wrote an article about it called “5 Principles To Jumpstart Your Finances And Get Ahead.” In that article I detailed some of the pieces of advice that I feel are most important to implement in order to get the most of the benefit for your finances.
If you aren’t familiar with what the 80/20 rule is, it is a basic principle that states that in any given event, roughly 80% of the effects come from 20% of the causes. In relation to what I’m talking about with personal finance, you can get roughly 80% of the benefit by utilizing 20% of the most key information.
In the case of personal finance, what would be the top pieces of advice that are going to get you the most of the benefit, without having to become an expert?
I wrote this particular article because I speak to a lot of people who are always asking me for advice, but a lot of the time it’s just in regards to how to invest their money.
Another reason is that I see a lot of advice around things that you can’t actually control… like investing. (We’ll get to that in a minute)
Investing is certainly an important part of personal finance, but it’s just that, a part of it… not everything.
But people get so wrapped up in the world of investing that they spend countless hours researching the next investment they want to make. This is all in an attempt to increase the outcome of their investment portfolio (i.e. – get a higher return).
This isn’t a bad thing to want to happen, but it can be a fruitless endeavor depending on what you are focused on.
STOCK MARKET FEARS
Recently, I’ve been getting more and more questions about investing – specifically, what my thoughts are on the stock market and will it crash.
The short answer is: I don’t know.
In fact, no one knows, for sure. There are plenty of people making predictions, but that is a constant state of affairs.
[Should You Be Hoping For The Stock Market To Drop?]
And that’s the dirty little secret about investing – No one is really certain about what’s going to happen in the stock market. And no one can really control the outcome with absolute certainty.
Even if you could predict the day the market will crash, you don’t know by how much or for how long, or when you should put your money back in.
[Should You Use Active Or Passive Investing?]
Studies show that if you miss the 10 best days in the stock market (because you took your money out trying to time things) it has a significant impact on your investment returns. In fact, a recent study by JP Morgan showed that over the 20-year period from Jan. 1, 1999, to Dec. 31, 2018, if you missed the 10 best days in the market it would cut your returns in half! And that’s just for missing 10 days!
The inverse could be said about missing the worst days. If you were able to avoid those, you’d see a nice increase in your overall returns.
The difference is that it is infinitely more difficult to predict the 10 worst days and be able to jump in and out at the right time, instead of just staying in for the long run.
AREAS YOU CAN IMPACT
So, let’s go through some different areas you can and cannot impact.
Investing
I know, I know – I just told you that it’s really hard to have any direct impact on your investments. But that was in relation to investing in the stock market and other financial products.
There are two areas I think you can have real impact on the returns of your investments – Real Estate and business building.
If you are trying to invest in the stock market, there are a ton of studies to show that you shouldn’t spend time in this area, and you should just invest in a low-cost passive index.
But if you are interested in doing some additional work, Real Estate and Business-Building are two areas you can directly impact the results.
If you purchase a multi-family rental property there are specific actions you can take that can increase the likelihood of the property increasing in value. (Link to RE article)
[The 5 Key Reasons Why Real Estate Investing Is Awesome!]
If you open your own business it certainly won’t be easy, but you are in control of the outcome, to a large extent.
On the other hand, if you purchase shares of Apple stock, you really don’t have any control or say in the direction of the company. You are just along for the ride.
Savings Rate
I’m sure you’ve heard this before, but you probably need to save more money. 😉
Everyone is looking for a silver bullet with their investments in order to make up for a lack of savings. People just don’t want to make sacrifices.
If you make $100,000/year and are saving 5%, you’re putting away $5,000 each year.
If you invest that money and it earns a 10% return in the stock market (which is pretty solid), then you’ll have earned $500 in investment returns and be left with $5,500 at the end of the year.
Well, if you would just focus on increasing your savings rate and get it up to 10%, you would have saved $10,000. Even before investing you are WAY ahead of the first scenario.
Even if you get 0% return on your investment, you’re still coming out ahead for that one year.
That’s control over your financial stability!
Expenses & Fees
This is one of the easiest areas to have an immediate impact on your finances.
Whether it’s expense ratios for mutual funds, account fees for your checking accounts, or interest rates on your credit cards or loans, expenses and fees are an area you can absolutely control.
When a recent new client expressed too me his concerns about a stock market crash and what we could do, I told him a few things.
There is certainly a risk of a crash, but no one can predict it with 100% accuracy – not the timing, nor the severity.
You certainly want to factor it in when creating an overall portfolio, but I like to put more effort toward the things we can control, like costs.
If I help a client find a lower-cost alternative to the current investment they are in (assuming it’s an equivalent investment based on its objectives), then we can know with absolute certainty how much money they will save.
For example, if they have $100,000 in a mutual fund that is charging a fee of 1.10% per year, and we move them to an index fund charging .10%, then they will save $1,000 over the course of the coming 12 months! And every subsequent year. That is in your control and is real savings, which means more money in your pocket!
Portfolio Turnover & Taxation
Many people think that they don’t have much control over the amount they will be taxed. This just isn’t true.
By creating a forward-looking plan, you can allocate your assets into tax-advantaged savings vehicles that will have a positive impact on your tax status.
Also, if you are using an account without tax advantages, like a brokerage account, then the turnover rate is something to pay attention to.
Turnover rate is just the frequency in which you are buying and selling your investments. The more you buy and sell, the worse your tax situation will be, generally.
THINGS YOU CANNOT CONTROL
Investment Returns
I’ve already mentioned this several times in this post, as well as in other blog posts.
Let’s just say it isn’t impossible, but the odds are stacked against you…
Law Changes
This is one that boggles my mind.
I get people messaging me about a recent headline they read about a politician talking about an idea around policy change, a new law, or something else they want to do.
I rarely read these articles. They are a complete shot in the dark and are talking about something that isn’t a reality.
Yes, if it actually becomes real I’ll read about it and get educated on what it means for me and my clients. But I don’t recommend wasting your time worrying about something that most likely won’t even happen.
There is no planning that is needed for something that isn’t even real.
Unexpected Events/Emergencies
Ah, the unknown.
This is simple. You can’t control what might happen to you or your family, but you can prepare for it by having an adequate emergency fund and creating a strong financial foundation for you and your loved ones.
The more stable your finances are, the easier it will be for you to deal with any of life’s emergencies.
UNLEARN WHAT YOU HAVE LEARNED
As Yoda once told Luke, “You must unlearn what you have learned.”
The financial industry has been hammering you and everyone you know with ideas around investing, for years. Trying to get you to think that you can control this area of your finances, and that it’s a good use of your time.
They give you ideas around how you should invest your money, and what products you should be using to accomplish this.
But, as much as Wall Street might want to have you believe otherwise, it is really difficult to control the outcome of an investment. Even the “best and brightest” get it wrong most of the time.
On the other hand, you can certainly control the things I’ve outlined in this article.
Begin by focusing on what you can control – the things that will have a real impact on your outcome. Begin there and you’ll enjoy an immediate return on your time and effort.
Capably Yours,
Jared
