BEING A BOOKWORM, I’ve read countless tomes on investing and personal finance. Many were helpful, but my favorite isn’t even about finance. Instead, my vote goes to Stephen Covey’s masterpiece, The Seven Habits of Highly Effective People.
Surprised? What does a self-improvement book about character development have to do with finance? The connection between the two didn’t occur to me until I recently listened to a podcast on personal finance books. Several picks were about the psychology of money and sound financial habits. That’s when it dawned on me how much Covey’s book has helped me with my finances.
It’s been years since I first read the book, but I still skim through it every now and then. As I practiced the lessons over the years, I got better at my work and personal commitments. Unknowingly, these seven habits also crept into my financial decisions.
Habit No. 1: Be proactive. Financial success won’t happen automatically. We each need to take the initiative and take responsibility. Proactive people realize that procrastination and success seldom go together. They do whatever it takes to get on a wealth-building path.
That begins with figuring out the steps toward financial independence. Proactive folks use all available resources to learn. They ask for help from mentors, family members, coworkers, friends and professionals, until they get a handle on financial matters.
Instead of leaving things to chance, proactive people focus on things they can control. They don’t complain about unfair pay, because they’re busy finding ways to increase their income and reduce their spending. Result? Missing the employer’s match on a 401(k) or paying sales loads for underperforming mutual funds don’t exist in their playbook.
Habit No. 2: Begin with the end in mind. How many of us have gone through a phase of mindless spending or aimless saving? How many still are? I know I have, and I suspect I’m not alone.
Before hitting the road, we better know where it leads and if it’s heading to the place we want to go. The same is true for our life and money goals. Without a firm handle on our financial objectives, it’s nearly impossible to know how much to save, how to allocate investment assets and how to be tax smart. Without a written investment policy statement, it’s hard to start building assets and to stay on track.
What could go wrong if we lack direction? We may spend too much for too long on the wrong things, only to realize later that important money goals were left behind. Or we may end up working too hard until later in life and save tons of money, only to discover that there isn’t enough time left to enjoy the wealth we’ve amassed.
Habit No. 3: Put first things first. Our time and energy aren’t limitless, but our desires tend to be. We can only amass a finite amount of savings, while our demands can seem infinite. How do we strike the right balance?
The trick is simple. Prioritize the important stuff—which will likely include long-term goals that don’t currently seem too urgent—and forget the rest. Is it important to get the car fixed if it breaks down? Of course, it is, so why not save some money for emergencies? Will we need money after we stop working? You bet, so why not take a chunk of each paycheck and stash it in a retirement fund? Is it important to have a shinier car than the neighbors? Maybe not, so how about using the money instead for a more meaningful purpose?
Habit No. 4: Think win-win. As a novice investor, I picked individual stocks and had some beginner’s luck. I was convinced I could outperform other investors, because I didn’t truly understand the difference between skill and luck. I hoped to win by outsmarting the person on the other side of my trades.
Before my delusion caused serious damage, I came to learn about the win-win game of passive investing. Stock investing doesn’t have to be a zero-sum game. The pie gets bigger over time, thanks to long-term economic growth and its positive impact on stock prices. Passive investors win by owning diversified portfolios that are guaranteed to collect the market’s return, while low-cost fund companies win by earning reasonable fees from a large asset base. That’s a win-win.
Habit No. 5: Seek first to understand, then to be understood. We often promote our own point of view, while failing to listen to others. In life, this makes it hard to build relationships and collaborate with those around us. When investing, it leads to myriad behavioral biases. For instance, when we’re too rigid about our investment thesis, we lose objectivity. We selectively seek out information that confirms our beliefs. But if, instead, we listen to other points of view rather than pushing our own, we can avoid such overconfidence and the financial damage that often results.
Habit No. 6: Synergize. The ingredients of financial success are well known: Start early, embrace frugality, get your asset allocation right, dollar-cost average and so on. But the real magic happens when all these ingredients work together and reinforce each other. That synergy ignites the power of compounding and has the potential to make our financial future so much brighter.
Habit No. 7: Sharpen the saw. Learning about personal finance and money management isn’t hard. To get started as investors, all we need to do is grasp a few basic financial concepts.
But as we progress through life, new financial challenges inevitably crop up. Thinking about buying a home? Wondering if your taxes are too high? Hoping to send kids to college? Worrying about retirement? To navigate these issues, we need to make financial education a lifelong endeavor.
Sanjib Saha is a software engineer by profession, but he’s now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles.