Years ago, I had an epiphany as I read Stephen Covey's 7 Habits of Highly Effective People. I recognized that by consistently applying correct principles, I could be an agent, making intentional choices about how I lived my life as opposed to being an object who was always at the mercy of the forces around me. I also recognized that Covey's premise implied the opposite. If I chose to not follow correct principles, I could not expect to achieve the outcomes I desired. As Covey states, "Principles are like lighthouses. They are natural laws that cannot be broken. …We can only break ourselves against them."
During more than 20 years as a financial advisor, I have seen that our financial lives reflect a similar dynamic. Whether you are a Silicon Valley mega-millionaire or a regular family just trying to make ends meet, there are certain financial principles, which if lived, will endow you with confidence and financial peace. Violate them, however, and all bets are off. Here are eight financial principles that seem to be most impactful.
- Learn how money works. There are several good books available. A good starting place is Dave Ramsey's best-selling book The Total Money Makeover. My wife and I give this book as a wedding gift to every young couple we know. I can only imagine their initial reaction when they open it, but several have come back years later thanking us and telling us how that book changed their lives. I can't recall ever receiving a thank you like that for a toaster oven.
- Get an education. A good education is a vital foundation for a good career. Please note that I am not saying get a college degree. College isn't right for everyone, but no matter which way you go, get the best education available for what you want to do. If you want to go into the trades, attend the best trade school you can find and get the certificates you need. If you want to go to college, go the best school you can get into and find the degree that best supports your desired profession.
Once you finish your formal schooling, become a life-long learner. Staying current with your education will help you stay relevant as the world changes around you. When I was in high school, I told my mother that I was worried about how I was going to make a living when I was older. Jobs seemed scarce and the competition was fierce. She said, "Remember, there is always room at the top." No matter your field of endeavor, education will help you get to the top. - Live within your means. You have more control over spending than any other aspect of your financial life. Make sure you scale your lifestyle based on how much you actually bring home and not on how much you expect to earn in the future.
- Stay out of debt. Save enough to pay cash for big purchases. If you use credit cards for convenience or security, make sure you pay off your credit cards every month. A mortgage can be okay, as long as it isn't too large for your income.
- Pay yourself first. There will always be competing demands for your time and money, so make yourself and your family your top priority. Before anything else, set aside 10 percent of your earnings for long-term savings, then live on whatever remains. The compound interest you earn on the money you save will help your wealth grow at an accelerated pace.
- Don't try to pick stocks or time the stock market. It doesn't work and trying will only add risk to your portfolio. When your buddies tell you how much money they made in Tesla or some other hot stock, just smile and remember that people never talk about their losers.
- Diversify your investments using mutual funds or exchange-traded funds to gain broad exposure to major asset classes. Asset allocation is the most important decision an investor makes. You can do so cost-effectively with mutual and exchange-traded funds.
- Use low-cost, passively-managed broad market index funds. Academic research repeatedly confirms that most active managers do not outperform the market and it is very difficult to know ahead of time who the outperformers will be.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to smerrell@montereypw.com.