Like last week, I am almost hesitant to write this week’s post, but the statistics clearly indicate that something needs to be said and done.
The Foundation
While 52 Steps Forward is not a how-to manual, here are some straightforward sound practices:
- Track your spending and net worth. These no-cost habits enhance your financial decision-making and naturally improve your results.
- Save 10-20% of your earnings. It is not what you make, but what you keep. Median household net worth is only $192,000 (2022 data).
- Do not be a credit card debtor. About half of cardholders carry a balance from month to month.
- Fund an account with 1-2 months’ salary to cover foreseeable, non-routine expenses (air conditioning or auto repairs). Nearly 40% do not have cash to cover a $400 “emergency” expense.
- Fund a separate account with 3-6 months’ salary as an emergency fund (for an extended period of unemployment, significant medical expenses).
- Insure your risks: Medical, Property, Disability, Life.
- Fund your retirement account. A third have no savings, and most are woefully unprepared.
Obviously, no one can execute all these steps in one fell swoop, as our income and savings rate constrain our ability to do so. However, just as the compounding cost of owning a $10,000 more expensive car significantly impairs our savings (last week’s example), any saving brings an equally compounding financial increase.
For most, the issue is NOT that they do not make enough money, but that they do not do the right things with the money they make. The Millionaire Next Door study revealed that most millionaires had regular jobs and incomes; the key was living well below their means (modest homes and cars for their income level) and saving consistently.
Capital Deployment
Occasionally, friends ask me for investment advice. For 95%+, I advise them to dollar-cost average into a diversified portfolio of Exchange Traded Index funds and rebalance periodically. And for the love of everything you hold dear, do NOT try to time the market; you will lose more often than in the casino. The answer entirely underwhelms the requester, having expected something far beyond what a simpleton could execute.
What the program lacks in sophistication, it makes up for in effectiveness. The S&P 500 Index ETF outperformed 85% of actively managed large stock funds over ten years (92% over 20 years). What about super-smart hedge-fund managers? Warren Buffett bet five hedge funds that they could not beat the Index over ten years. The Index beat every fund and more than tripled the average annual returns.
The Other Half (Actually <10%)
For those with the inclination and intellectual and emotional wherewithal, you should pursue your own business venture or make more concentrated, higher-risk investments (private equity deals, crypto, real estate, individual stocks, etc.). The astute, disciplined, and patient investor has a fat bank account.
For those not so astute (including myself), but who cannot resist dipping their toe in the water, you can safely allocate 10-20% of your investment portfolio into higher-risk/return investments once your portfolio equals 5 times your annual income.
The “Harsh” Consequences
By following these basic strategies, you will not become a billionaire, light cigars with 100-dollar bills, post a selfie on a hundred-foot yacht, or alight from a red Ferrari at the casino in Monte Carlo. However, you will have a higher net worth than 90%+ of those in your income bracket, sleep more peacefully, be able to assist your family and charitable causes, not fall for a get-rich-quick scheme, and be far less likely to become a financial burden to your family or the community.
__________________________________________
Disclaimer. I am not an investment professional; the contents of this email are my opinions based on my experience. Your situation is different. You should conduct research and consult with investment, legal, and tax professionals before making any financial decisions.
