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3 Pieces of Financial Advice Many Hate to Hear Thumbnail

3 Pieces of Financial Advice Many Hate to Hear

By now, it is likely you have seen an abundance of “Key personal finance must-do’s” all centered around New Year's resolutions. While I’m also here to offer some personal financial advice, before I do, I believe it’s prudent to start with why. After all, the “whys” are the reasons I stay motivated to keep my financial house in order. When the “whys” become big and important enough, then the “must-dos” and the planning becomes easy. As you read this, consider what your motivations might be and don’t be afraid to ask yourself what your whys might be. 

My three reasons why:

1. Celebrate retirement – A friend and his wife are going on a backpacking trip to celebrate their milestone. This one will be unlike their prior adventures. It is designed to be flexible and unscripted – a three-month trek of diving, hiking and exploring the Maldives, India and Nepal. Whether my bride, Georgia, will be game for a similar adventure or prefer a five-star tour for our future retirement is another question. Nevertheless, their trip is inspiring and represents what financial independence means to me – freedom, choices and options. What’s important about money to you?

2. Safety net – Half of Americans have less than three months’ worth of living expenses socked away in cash reserves according to Bankrate’s July 2021 Emergency Savings Survey. One in four Americans indicates having no emergency reserves. My wife and I were taught to “not head over the hill without a full tank of gas” and to have a rainy-day fund. We have passed the same lessons to our daughter. How can we train future generations to build their safety nets?

3. Aging with dignity – Most people want to live life with dignity and independence and not be a burden to anyone.  However, life has a way of surprising us. I want to willingly give up my car keys when needed (hopefully I’m not a stinker at that time) and I don’t know how bumpy my final years of living will be. I don’t feel “the one who dies with the most toys wins,” especially, if one doesn’t have his health. How are you building and protecting your physical and mental health in addition to your finances?

Now, for those three pieces of advice I feel everyone hates to hear, hopefully, made more bearable if you have your “whys” in mind:

 1. While it is better to save for retirement sooner than later… it is also important to just save. Albert Einstein once described compound interest as the eighth wonder of the world, “he who understands it, earns it; he who doesn’t, pays for it.” Compound interest is about reinvesting your earnings, earning interest on interest, and helping accelerate the growth of your money. The earlier you start, the better. Someone who saves $6,000 a year starting at age 25 accumulates about twice as much at age 65 compared to one who starts 10 years later at 35 ($928,000 vs $474,000 at 6% return). Two sidebars: First, many investors start saving for retirement later in life. Priorities in their early years may include building their careers, buying homes, and raising and educating families. And second, no fancy investment strategy can make up for insufficient savings.

2. Quit trying to time the market, and other bad investor behavior. As much as we think we’re making smart, rational decisions, we are often our own worst enemy. Emotions and bias get in the way, and we can be predictably irrational says Dan Ariely, author of Predictably Irrational. Research by Dalbar, Inc., a company that studies investor behavior, shows the average investor earns below average returns. According their 2021 study, the average equity investor underperformed the stock market by nearly 1.5% annually during the 20 years through 2020. This gap is attributed to bad investor behavior including market timing, over or under-confidence, panic, speculation, leverage, and more. Successful market timing requires you do two things exceptionally well: exit (sell) and re-entry (buy back). You may get one right, but seldom both. Instead, it’s generally better to ride out stormy market conditions.

3. Plan for the inevitable. Many investors are eager to discuss tax and investment strategies, downsizing homes, and education funding. However, estate planning often takes a back seat or a “let’s revisit that later” attitude. Reasons may include talking about mortality, incapacity (dementia or Alzheimer’s), and family dynamics to name a few. What would it take to have such “elephant in the room” conversations? 

May this sage advice help you secure your future wisely.

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