Obviously, no financial professional can guarantee a certain investment or financial outcome. The future is unknowable after all, and the best we can often do is come up with a plan and make prudent adjustments over time. However, I wanted to share some rules that I think can bring the chances of financial success as close to 100% as possible:
#1 – Start Early
Without a doubt, starting early down the path of financial discipline will pay tremendous benefits over time. As the proverbial tortoise did when racing the hare, one doesn’t need to run at a full on sprint to win the race. Slow and steady progress is what matters.
#2 – Save 15% for retirement
True wealth comes from spending less than you earn. Someone who earns $1,000,000 per year will never be wealthy if they live paycheck-to-paycheck (surveys indicate that 40% of people making $300,000+ live paycheck-to-paycheck).
Someone earning $50,000 per year can retire in their 30’s with proper spending discipline and planning. Saving 15% for retirement is a supreme gift to your future self.
Saving is important. But how you save can make a big difference. Making full use of tax-advantaged accounts for retirement savings can often add 1-3% per year to lifetime returns. By “full use” I mean maximizing contributions, getting all employer matching funds, and keeping assets in the accounts for as long as possible.
#3 – Make compounding work for you, not against you
Compound interest cuts both ways. If you have credit card debt, the 25%+ interest rate is like compounding in reverse. Keep debt to a minimum and never borrow money to purchase a car or any “toy” (i.e. boat, 4-wheeler, RV, etc.). Sure, if your car dealer offers a $1000 incentive to take out a loan, go ahead and take it out, but pay it off within a few months.
#4 – Hedge or avoid life changing risks
There are a few components to this.
First, buy sufficient insurance. If a house fire will destroy your finances, then you need insurance. Be sure to cover property, life, disability, medical, and liability risks.
Second, use commonsense. Drive safely. Remove hazards in or around your home (i.e. get rid of that giant trampoline).
Third, diversify your investment risk across multiple asset classes and securities. Think of broad diversification as insurance for your portfolio.
And last, do your best to manage relationship risk. Divorce is a huge financial hit for most people, so choose wisely.
#5 – Invest in yourself
Warren Buffett has extolled the virtues of investing in yourself through lifelong learning and skill development. Many skills are free or very low cost to learn, and can pay off handsomely in the form of a better job or promotion, or even just enhanced self-esteem. Above all, take care of your mental and physical health as best you can. And don’t neglect “soft” skills such as learning to make friends or network with business associates.
#6 – Stay the course
One interesting thing about compound interest is that, early on, you can barely tell that it’s working. Saving and investing for retirement in your 20’s can often feel like trying to fill up a swimming pool with a thimble. But if you stick with it, by your 30’s that thimble will be closer to a milk jug. And in your 50’s you’ve got a 5 gallon bucket! Big things have small beginnings!
However, if you get discouraged and stop filling that swimming pool at any point, then you’ll likely inflict significant damage on your lifetime financial success. So stay the course!
#7 – Be flexible (and relentless)
Last but not least… it’s important to remain flexible. For many people, life is hard. Really, really, really, really hard. And there will be setbacks. For sure. The markets won’t cooperate. You get fired from your job. Your health falters. Whatever horrible thing you can imagine.
But when life hits you, try to bend and not break. Roll with the punches and get back to work. If you put one foot in front of the other, you might be surprised with what happens.
