A new columnist for the New York Times kicked off his column by writing about his five basics for building a solid financial future: Investing is simple It still may be worth paying for help Peers may know more than professionals Everything can (and should) be automated and Have the talk. You can check out his column here. The list is similar to Dilbert creator Scott Adams’ simple 9-point formula and Dave Ramsey’s Baby Steps. Here are my five basics for financial success:
Spend less than you earn: If there is only one rule for financial success, it is simply to save money. Unfortunately, there are no shortcuts. The good news though, is that while it takes discipline to establish a savings habit, it is so much easier to keep it going. There are many strategies to save money: some save a percentage of their income and don’t worry about the rest, others budget their spending and plan to save the rest. Our household falls in the former category: we simply try and save one of our incomes and spend the other.
Invest regularly: It’s not enough to simply save money. It’s equally important to invest it wisely. The best investment method that works for everyone is simply invest the regular savings periodically in a diversified portfolio of stocks, bonds, cash and real estate.
Don’t chase performance & Keep costs low: The behaviour that hurts investors the most is chasing performance. It is hard not to be tempted when everyone and their brother-in-law is making a killing in commodities (or insert your “hot” sector or stock du jour here) but it is the surest route to under performance. Investors should also keep costs low by trading very little, keeping taxes low and keeping as much of the returns in the pocket by cutting out the middlemen.
Keep it simple: Lots of people keep four or five bank accounts, a portfolio of credit cards, five brokerage accounts and thirty mutual funds. This makes it hard to track spending, invest savings and maintain asset allocation targets. Investors also seek refuge in complex financial products like the Smith Manoeuvre, principal-protected notes, wrap accounts, flow-through funds etc. De-cluttering their financial life and embracing simplicity helps a great deal in advancing towards our financial goals.
Protect what you have: Far too often, we forget to insure against events that can have a devastating effect on our finances. If we have a family to support, we should get enough life insurance and get our wills done. Medical expenses in foreign countries can get really expensive, so it may make sense to get extra coverage.