NIKOLA TESLA was a brilliant inventor, with nearly 300 patents to his name. He also had some unique habits. Among them: Every night, before he sat down for dinner, he would ask his waiter for a stack of 18 napkins. He would then use them to carefully wipe down his silverware. Even at the Waldorf Astoria hotel, where Tesla lived for decades and where the silverware was presumably clean, Tesla insisted on this time-consuming process before every meal.
The first napkin, and perhaps the second, might have ensured a somewhat cleaner set of utensils—and it probably gave Tesla, who had contracted a debilitating infection as a child, additional peace of mind. That’s what economists would call positive marginal utility. It served some use. But beyond that, it’s hard to imagine that all that additional cleaning and scrubbing contributed much. It just took time. That’s called negative marginal utility. It consumed time without adding any value.
When it comes to managing your finances, I suggest looking at things through this same lens. The financial world, unlike more scientific fields, is full of uncertainty. In many situations, additional effort won’t get you any closer to a better answer—just as wiping down the silverware for the 18th time won’t make it any cleaner.
This notion strikes many folks as counterintuitive. When we were children, we were taught to work hard—and indeed, in most endeavors, additional effort does yield a better result. But in the world of finance, it’s more nuanced.
Historically, when people talked about personal finance, they focused primarily on investment-related questions—which way the market was going, which stocks were hot and so forth. For years, these kinds of questions received the lion’s share of attention from both experts and everyday Americans. But research has shown that time spent on these questions often isn’t time well-spent. Stock picking, market timing and economic analysis rarely yield positive returns. What’s worse, these activities also tend to leave investors with higher investment costs and bigger tax bills.
Don’t get me wrong: A well-constructed portfolio is certainly important and certainly worth your time and effort. I would just be careful not to give your portfolio too much attention—especially at the expense of other important financial questions. Below are six topics that I see as a much better use of your time:
Tax planning. The rules are the rules. But are you doing everything you can to minimize your tax bill within those rules?
Debt management. Are you managing all of your obligations with an eye to cost, tax-efficiency and peace of mind—especially with the tax rule changes that went into effect last year?
Goal planning. Are you on track for your own retirement? What about your children’s college education? If not, how could you get on track?
Estate planning. If the federal estate tax exemption reverted to its old, lower limit, would this be a problem?
Risk management. Do you have sufficient disability, life and umbrella liability insurance? Following this decade’s long bull market and the big boost it may have given to your net worth, is it possible that you have too much life and disability insurance—and too little umbrella coverage?
Career management. In my work as a financial planner, I’ve noticed something surprising: Some employers—even those that appear similar on the surface—offer benefits that can result in vastly different total compensation. This may take the form of supplemental retirement plans, profit sharing programs or equity grants. Result: Some people end up with total compensation that can be 50% or 100% higher—for exactly the same work. Since these incremental dollars are more likely to be saved, the impact on your wealth could be dramatic. This, I think, is something that is underappreciated—and worth paying attention to as you manage your career.
Adam M. Grossman’s previous articles include Three Risks, Room to Disagree and Never Mind. 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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How should we think about choosing the right amount of umbrella coverage? Net worth? Something less? The discussion with my insurance agent on this topic years ago was unhelpful.
It’s a great question — and I don’t have a good answer. But my sense is that having some coverage — maybe a $1 million policy, which seems to be the minimum — is a smart move, because it ensures the insurance company gets involved and their attorneys fight on your behalf. Obviously, a bigger policy offers more protection, but that first $1 million will get you your legal team.