Alternate title: 10 Things I Wish They Taught in Finance 101, but Don’t. I include this list in every client’s Investment Policy Statement, but I think it’s also worth sharing here!
- Save more. An increased savings rate is the single best thing you can do to improve your financial outlook. Relying on high short-term investment returns is not something you ever want to do. Save early and often and time will take care of the rest. Investing is geological — a study of time and pressure — which is boring, but produces amazing results.
- Low-fee investment products are superior. If it costs a lot, BE WARY. Picking the lowest-fee investments is a surprisingly effective strategy, if given only cost information.
- Take the free money. If you aren’t maximizing “free money” from your employer’s retirement plan via employer match or employer contribution, you’re doing yourself a serious disservice. Future You really likes when Today You gets free money.
- Simplicity wins — always, forever and ever. I’ll say it again: SIMPLICITY. WINS. If something in your financial life is complex, ask yourself “why?” because there’s probably a way to make it better by reducing complications.
- Automate. Allowing yourself to make less financial decisions is a big benefit in the long-run, whether it’s selecting “auto-pay” for your bills or for setting up automatic contributions to an IRA. You are much more likely to stick to a plan if you allow automation to be a smart autopilot for your financial life.
- Debt should be treated as an emergency. Distinguish it early and often and you’ll have much more financial freedom. The benefit of just one extra payment per year is astounding.
- You are your own worst enemy. It’s a difficult subject to quantify, but humans are emotional beings who rarely make purely rational financial decisions (especially when distressed). Forcing yourself to wait a specified period of time (three days, a week, or two months — your call) before acting, will set up a buffer between you and a destructive decision.
- Financial markets are mostly efficient. You may be able to “outsmart” other investors once, but many smart investors have been completely steamrolled by forgetting to just get in line and take what the markets give. It’s cheaper, and brings better results, to patiently invest.
- Ignore pundits, prognostications and predictions. Anyone who claims they know what’s going to happen in the economy or financial markets is trying to sell you something other than advice.
- It always pays to wait. Whether it’s delaying the start of a pension or waiting on Social Security until age 70, the concept of delaying consumption today for a higher rate of consumption tomorrow is generally a very good bet – especially because it reduces your chance of running out of money. Unless you’ve been given an expiration date, having the discipline to wait is always a highly compensated activity (or should we say “non-activity?”).