The internet loves a list, so here you go, our top ten list, in order of priority. Sort of.
1. Start as early as possible.
Time is the most precious commodity of all, and the way compound interest works, the fat part of the curve is in the final years. Every year you don’t save at the beginning is a year you likely won’t save at the end. It doesn’t have to be a big amount, just start.
2. Plan for health care costs.
As a species, the greatest threat to our financial well-being is our health. No matter how much spinach you eat, or how much you work out, having a plan to address this risk is critical. You can retain it, transfer it to an insurance company, or some combination thereof. Just don’t let yourself rationalize that “it won’t happen to me.”
3. Diversify properly.
Charlie Munger has said, “The idea of excessive diversification is madness.” Many have taken his words the wrong way. We see a lot of people who have IRAs or brokerage accounts with a dozen or more mutual funds. They (and their advisors), feel they are “diversified” because they see lots of fund names – but all the funds are all invested in the same stocks and bonds. There are five main asset classes: stocks, bonds, commodities, real estate, and cash. Every investment under the sun is directly or indirectly related to one or more of those five categories, and all five should have adequate and investment horizon appropriate representation in your strategy.
4. Be patient.
Munger also once said, “The big money is not in the buying or selling, but in the waiting.” We are not evolutionarily well-equipped to make good decisions in this area. The area of our brains where financial decisions take place is the same area that contains our fight or flight mechanism. When we see big drops in value, our flight mechanism kicks in and we want to sell to protect what’s left. When we see a lack of growth, we get anxious and want to add more risk, especially if we’ve gotten a late start in our saving plan, or we’re just not saving enough. Patience is or was a critical quality in every successful investor you can point to. So, the next time you get that itch, remember Wall Street makes their money when we move our money around, and all their messaging is designed to make you want to. Fight that urge to scratch.
5. Make a plan.
We don’t mean run an internet retirement projection calculator. We mean take time to visualize what you want for yourself in the near, mid, and long-term, then write all those things down. Writing your ideas down drives up the odds of them coming true exponentially. Then share them with someone else. Sharing that vision with others makes the odds go up exponentially again! It’s not magic, it’s human nature.
6. Look beyond the conventional and convenient.
Nobody ever got rich putting everything they saved for the future in a 401(k). Employer-sponsored retirement plans play an important role, and the packaged investment products Wall Street promotes do, too. But if you want to build real wealth, you will need to take higher risk and invest in real estate, closely-held business interests, or technology/ideas that the herd is not investing in. If the herd is buying it, chances are the opportunity ship has sailed.
7. Understand the tax treatment of vehicles you invest in.
Diversifying your money from an asset class perspective, as mentioned above, is important. But diversifying your money from a tax treatment perspective is every bit or more important. Americans have accumulated over twenty trillion dollars in tax postponed plans (funny, the government doesn’t call them tax postponed plans…), on the premise that they will be in a lower tax bracket when they retire. Many of them will be, because they’ll be broke. But that’s what you’re trying to avoid by reading this post. The lesson: don’t rationalize deferring (postponing) taxation on all of what you set aside for retirement because tax rates are more likely to go up than down or sideways in the future.
8. Put your own air mask on first.
We’re parents. We want to help our kids. But if we direct too much of our income to vehicles that limit our control, we eventually run the risk of not being able to help them anymore, and in fact, we become reliant on them – the very opposite of what we intended. We have lots of clients that have borrowed to pay for college. We don’t have any that have borrowed money to pay for retirement.
9. Don’t “invest” in your house.
Your house is not an investment. The equity you store in your house earns nothing, and you can only gain access to it when you don’t really need it. That’s not a good investment by anyone’s definition. Your house is a lifestyle expense. We’ve been sold a bill of goods by the banking and housing industry. Americans have been overspending on the place they sleep for decades, and this is going to have far-reaching repercussions.
10. Engage in the process.
This is actually number one, but we wanted to save the best for last. The bad news is no advisor or investment product can “fix this.” If you want to feel more confident about your financial future, make a commitment to find good resources to help you. Then work hard with them to learn about your options and make changes in the way you do things. I have a friend that says, “Things change when we change.” This is especially true when it comes to personal finance.
This isn’t an exhaustive list, but ten is a nice round number. And it’s a good start.