In 2008, when stock markets were turning ugly and the U.S. economy was collapsing into the Great Recession, I started writing this monthly column about personal finances based on my perspective as a certified financial planner.
At the time, the wall in my office reception area featured the following quote from Warren Buffett: “Someone is sitting in the shade today because someone planted a tree a long time ago.”
The quote made it easy to picture in the mind’s eye the results of a meaningful plan and prudent investment strategy, especially at times of financial chaos.
As this is column No. 100 in this space, I hope the insight and perspective shared has in some small way served as the planting of many personal financial trees that provide long-lasting benefits.
Certainly, there are many things to understand about money decisions. There can be enough complexities that even bright, successful people struggle to make the best of their financial opportunities.
At the core, however, there are basic principles that make up the essence of personal finance and apply to nearly everyone. Of the roughly 80,000 words I’ve written in this space, the ideas that follow are the ones that have the highest probability of being useful to people working toward financial freedom.
▪ “To achieve satisfactory investment results is easier than people realize; to achieve superior results is harder than it looks.” Benjamin Graham wrote this in the fourth edition of “The Intelligent Investor” in 1973. It is timeless.
Few people need to beat the return of broad markets to achieve financial freedom. Simply capturing the market return with low costs and a diversified portfolio will get most people where they want to be. It doesn’t require picking just the right investments, which increases your risk of picking the wrong ones.
▪ Saving at least 10 percent of your income throughout your working life will go a long way toward making you financially secure when paired with prudent investment practices. The later you start saving, the higher your savings rate will need to be.
▪ Where you can’t predict, plan. Investment returns, life expectancy and health-care costs are among the many influences on your life you can’t accurately predict. But you can plan for a range of possible outcomes and give yourself a solid foundation to make decisions from as you move through life.
The point of planning (financially or otherwise) is so that you improve your ability to choose from preferred options. If you don’t plan and settle for whatever the default choice for the unprepared is, you will not experience the satisfaction of flexibility of choice.
▪ Your human capital is more important than your financial capital for much of your life. Your ability to earn income is largely tied to your knowledge and skill set. Be good at what you do and continue to improve, making yourself more valuable.
Act as the CEO of You Inc. How can you improve the product and profitability of yourself? You have more control over this than you do over investment markets, real estate and other elements of your net worth.
▪ Rather than focusing on what you can do to retire early, focus your efforts on building a career or profession in something you will be happy to work at as long as you are able. It’s financially responsible but more importantly, will lead to more happiness than the alternative, seeking an early exit plan from your career identity.
▪ Investment markets will shift, sometimes swiftly in either direction. As the landscape changes, you need enough balance to remain sure-footed more than you need to shift in response.
When changing conditions cause you to think you should change your investment approach, that is the first step into a difficult relationship with markets and your money. Shifting your investments from conservative to aggressive and back again based on your confidence in the current environment does not work.
The best investment approach for you is whichever one you can stick with for your core financial security. To fight human nature to react, keep enough money for short-term goals (one to three years) away from exposure to potential stock market declines.
And if you’ve just got to satisfy your temptation with some speculative investments that might help you “get rich,” make those plays in an account separate from your core money earmarked to fund your goals and liabilities.
▪ Be adequately insured against your most significant risks. Employer-provided life and disability insurance are great benefits but they usually stop short of fully covering the risk to you and your family of losing your income.
There are, of course, many other topics worth your attention. But before you advance to finer points, make sure you have addressed the vital core of your personal finances.
Gary Brooks is a certified financial planner the president of BHJ Wealth Advisors, a registered investment adviser in Gig Harbor. Reach him at firstname.lastname@example.org.