No matter how much you start with, how much you have, or how much you want to make—there are some common financial principles that everyone should follow to best maximize their estate and get all the benefits that come with achieving financial security. Here are the mandates:
Save Early, Save a Lot. It’s the most obvious tip, but it’s the most important, because it will be the number one thing you can do to reduce financial stress. The more you save and the earlier you start saving, the more you will make—and the more freedom you will have. For me that means saving ten cents for every dollar you make for your future before you pay your expenses. That also means contributing the maximum pretax deductions from your earnings and taking full advantage of matching programs to really make your money grow. It’s not always easy to see your future 20 or 30 years down the line, but the more you make this a priority, the better you will sleep at night.
In the following graph, Sally saves $10,000 per year starting at year 1, and Bob saves $10,000 per year starting at year 11. Their accounts are both pre-tax qualified accounts and no funds are withdrawn to pay taxes during the 40 years. A 7% average annual rate of return is used. The lesson here folks is quite simple. Sally started saving early and ended up with more than twice as much as Bob. Save early. Save often. Time is your friend.
Take Advantage of Dollar-Cost Averaging. The results can be astounding. The reason saving early and often is so important is because of the concept of dollar-cost averaging—meaning that your money grows exponentially. If you’re 50 when you start saving, it’s the accumulated value of pennies to what you’d have if you started saving when you were 20—because the total value compounds and compounds and compounds. It feels almost like free money, and it will take a huge burden off of you.
Make Your Family Budget Your Bible. Make financial decisions based on numbers, not emotion! The biggest problem I see with many families—wealthy or not wealthy—is that they spend way more than they make. So they get into debt, they don’t save enough, they’re always scrambling, and they’re living the burden of an extremely stressful life. The couples who become true successes understand their income and understand that they need to make choices (no, you don’t really need that Lamborghini or high-dollar dressage horse). Smart families communicate their wants, look at the family budget, see where they can cut so they can afford the important things they want, and know that tough choices facilitate good ones later.
Explore Values along with Expenses. I always like to start our relationship with clients by telling them that the first thing we’re doing isn’t looking at the cable bill. The priority is that you—as an individual, a couple or as a family—need to articulate your family values. What’s important to you? What makes you happy? What are your priorities? Do you like to travel, or do you value education more highly? Do you want experiences or things? When you have a shared vision, you can make better choices. And when you have competing visions, communicating about compromises, and sharing is the first step to make smart financial choices.
Higher Risk + Longer Time Horizons = Higher Rewards. When you’re young, investing more assertively is often the better option because that’s where you can experience more growth (not such a smart move as you get closer to retirement). But some people aren’t comfortable with highly volatile investments, and they should look at more conservative approaches. In any case a diverse portfolio for your investments is your best strategy to take advantage of different ways to invest and to protect yourself when various asset classes or sectors underperform. This is certainly where we can come in to help you manage that diversity—and to determine your tolerance for risk over time (I call mine Irvin’s Stomach Ulcer Index!).
Set Aside Time for You. Let me be clear with this: just because I strongly recommend saving and making tough decisions, that does not mean that you have to live like a hermit eating Spam and rice every day. Life is about living. And having fun. And doing cool things. And buying stuff that gives you joy. And seeing the world. And buying that beautiful dressage horse if that’s what you love. The point is this: add those things to your family budget. After all, the point of being financially savvy and secure isn’t just about making sure you have enough money for retirement; it’s also about making sure you have the funds for fun in life too.
Achieving financial security isn’t about having a vast fortune or making extravagant investments. It’s about adhering to fundamental principles that foster financial stability and growth. Always remember, ultimately, financial security is about making informed choices that allow you to enjoy life fully while preparing for the future.