Do you feel like your finances are out of control? Or do you assume you’re “on track” because you choose to ignore the topic altogether? These are normal feelings! Money is just as much about emotions as it is about spreadsheets.
Here are 5 tips to gain confidence in your financial health and help you stay on track.
Develop the foundation of a plan
Why just the foundation? A plan is only a point in time; however, life isn’t static. Once you build the foundation, it’s much easier to adjust for changes along the way.
For example, if you anticipate a bonus or quarterly commission check, don’t freeze. Determine where to allocate the funds in advance and set up the investment into the respective accounts before it’s received. For example, 25% for savings, 25% for spending, 25% in your brokerage account, 25% for a specific goal (i.e., travel, home improvement, etc.).
Automate your investments
In his book, The Laws of Wealth, Daniel Crosby describes the importance of “designing a systematic process to avoid certain risks.” He explains that risk in investing (and life!) is certain. However, the magnitude of that risk is not. The last two years are living proof of this.
If there is no systematic process in place, it’s easy to abandon the plan when challenges and emotional events come your way. Just as you might automatically invest in your employer-sponsored plan, do the same for your:
- Brokerage account
- 529s
- HSA
- Extra principal payments on your mortgage
Take the emotion out of it
Are you worried about losing money in the market? Your life doesn’t ebb and flow with the volatility of an index. Invest to match your goals, not beat the market. Emotion trumps knowledge! We have endless charts quantifying the negative long-term effects of missing the market’s best days. If you stay invested, then you don’t have to guess when those days occur.
To time the market, you must be right twice: on the way out AND on the way back in. Even if you get one side of this equation correct, it’s doubtful to get the same result on the other side.
Think about this: the average investor’s return over the last 20 years was 2.9%, while the S&P 500 and a traditional 60/40 portfolio returned 7.5% & 6.4%, respectively (JPMorgan Guide to the Markets, Q1 2022). Which one do you prefer?
Remember, time is on your side
“Time in the market is more important than timing the market.” This is one of our favorite themes from Morgan Housel’s Book, The Psychology of Money. He illustrates this with the example of Warren Buffet. As of the book’s publication, Warren Buffet’s net worth was $84.5 billion…he accumulated $84.2 billion after his 50th birthday. No one is taking anything away from Warren Buffet’s success as an investor; we are just identifying that one of his greatest strengths is his time in the market.
Work with someone you trust
Do you have the skill, time, and discipline to commit to your plan? If so, fantastic! The chances are high that you may have one or two of these traits, but not all three. Life is busy. Tax and securities regulations change. Work with someone who has your best interest in mind so that you never miss a step along the way. Small changes today can have a significant impact over time.
If you need help getting on track and staying there, schedule a call with us today.