Adam M. Grossman
I RECENTLY LEARNED a new expression, TL;DR, which stands for “too long; didn’t read.” Twitter users and bloggers use it when they want to summarize an idea for readers who are short on time. It’s the modern equivalent of saying, “Here’s the executive summary.”
Coincidentally, this week, two people separately asked me what I see as the most important principles in personal finance. In other words, they wanted the TL;DR version, without too much commentary. In that spirit, here are 10 principles that, in my opinion, can help you achieve a happier, more successful and less stressful financial life:
- Remember what Stephen Covey, the productivity guru, used to say: Start with the end in mind. Financial plans don’t need to be long or overly complicated, but you do want to have a specific idea of where you’re headed financially. For example, “I want to retire at 67, purchase a condo in Arizona and be able to spend $75,000 a year.” It’s much easier to know whether you are on track when you have a specific goal in mind.
- Know your “big four”—assets, liabilities, income and expenses—and get them on one sheet of paper. This will make it much easier for you to measure progress toward your goals.
- Insure yourself, but only against losses you couldn’t absorb on your own. In many cases, it’s possible to significantly cut insurance premiums by increasing deductibles. For example, if you have a seven-figure net worth, there is no reason to have a low deductible on your homeowner’s insurance. Instead, ask your insurance company how much you could save by raising your deductible to $5,000 or even $10,000. Similarly, you should re-evaluate your life insurance as your net worth grows. You will likely become “self-insured” at some point, and then you can simply drop that coverage.
- Avoid rules of thumb when investing. In the investment world, there are all sorts of rules. For example, some say that the percentage of your portfolio that should be allocated to stocks should be equal to 100 minus your age. To me, that’s silly. Everyone’s financial situation is different, and your investments should reflect that.
- Recognize that personal finance is only partly objective; a much larger part is subjective. For example, clients often ask me how much cash they should keep on hand. While we can work out the optimal number mathematically, the real answer is that the “right” amount is the amount that helps you sleep at night.
- Be especially wary of the psychological bias known as recency, which causes us to place disproportionate weight on our most recent experiences. This is a particular concern today, when the stock market has been going up, in more or less a straight line, for so many years that it seems hard to imagine it doing anything else.
- When investing, follow an evidence-based approach that relies on the best academic research, including insights into the difficulty of beating the market and the risks associated with higher expected portfolio returns. Avoid financial fortunetellers, who believe that they can forecast the future of the economy, the market or particular investments. Also, avoid making financial decisions based on gut feel, anecdotes, stories, tips, fear, fables and, perhaps most important, things your brother-in-law tells you.
- Keep your financial life simple. Avoid letting anyone sell you an investment that you don’t fundamentally understand. Not only does this help to keep your costs down, but it also makes it much easier to monitor your financial picture.
- Avoid high fees. The research firm Morningstar once wrote, “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make better decisions. In every single time period and data point tested, low-cost funds beat high-cost funds.”
- Understand that estate plans aren’t just for the ultra-wealthy. You definitely want to have some plan on paper, especially if you have children. Be sure to include a health care proxy, so someone can make medical decisions on your behalf if you become incapacitated.
Adam M. Grossman’s previous articles include Right but Wrong, Growing Up (V) and By the Book. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.
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