Last Friday I posted a financial tip that I use in my own journey to financial independence: track your spending. I also noted that many blogs have specific features. So in that spirit I am announcing a new weekly feature to this blog: Financial Tip Friday. Every Friday I will offer a financial tip that I use or others use in their own lives to curb spending, save, invest, etc. If anyone would like to guest post and offer their own tips please feel free to contact me and we can arrange a guest post.
This Friday’s Financial Tip: Keep It Simple. Now you might be reading this and saying well duh Jason. Of course we should keep it simple. It may sound easy on the surface, but it is amazing how many people don’t make their financial lives simple. They have financial accounts at five different brokerages; 401k plans that they haven’t rolled to a single IRA; Multiple credit cards for different kinds of spending; 25 bazillion mutual funds or stocks that they can’t keep track of it all. So while it may seem simple it is amazing how many people don’t.
Simplicity #1: Keep All Your Investments Under One House
I fully admit that I am one of those people that checks their retirement investment balance on a weekly basis. Most people recommend that you just check it a couple of times a year to make sure everything is on track. I guess I like to see it grow. The point is that if I have multiple investment accounts at various places and have to remember usernames, passwords, etc of varying kinds it would drive me nuts. So keep it simple by trying to put all your investments under one house. That house can be with a major brokerage firm, with a specific financial adviser or whatever. Putting everything under one house also allows you to check in on things quicker and make changes easier to your investments.
Now let me clear I am not saying that your investments only have to be mutual funds, or stocks or whatever. Plenty of people do well with real estate and other investments. I just mean that if you are going to have a 401k, an IRA, and perhaps a brokerage account keeping everything under one house makes your life simpler.
Simplicity #2: Invest in Only Things That You Understand
Investing, in my opinion, really isn’t that hard. But like a lot of things in life you actually have to sit down, study, and learn a little bit to make informed decisions. To be an informed investor it is almost like you need another vocabulary lesson. That is fine. I mean we have all kinds of different vocab lessons in our lives like when we learn new technologies, a new industry, a new program at our job, perhaps even a new job. Each item comes with its own vocabulary that we have to learn. Same thing with investing.
Unfortunately, there are some people who try to muck people’s investments by making it complicated. They don’t explain things to you in a way that anyone could understand. They just want you to trust them. Now there are some great financial advisers out there. My friend Chris is one of them. He is extremely knowledgeable, fair, and will tell it to you straight. And he will do what you want him to do, but he will also explain things and teach you a thing or too. Never, ever, ever invest in something you don’t understand. If you don’t get what it is you are investing in and don’t understand the full picture. Stop immediately.
Simplicity #3: Be Vanilla
What do I mean by vanilla? I mean don’t try to get yourself wrapped into any kinds of investments or financial schemes that you need an infomercial for. There is no need for that. Get rich quick schemes are bogus! I am sorry there is no magic formula out there or program that is suddenly going to make you rich. The story hasn’t changed: the tortoise always wins the race. Slow and steady typically wins.
That is why I don’t invest in a lot of fancy mutual funds. I do invest in some things are aggressive, but nothing that is really truly risky and going to cost me a lot of money. My recommendation for anyone starting is use Index Funds as the bedrock of your financial plan. Index funds are easy to understand because they are mutual funds that merely track an index (e.g. the S&P 500, the Russell 2000, the Dow Jones). They also have extremely low fees and don’t get into fancy investments. All they do is basically track an index. When you buy an index fund you are essentially buying that entire index. I have index funds in my own portfolio. Not all of my money is index funds, but that is because of the choices I have in my retirement accounts. I don’t have access to some of those funds so I have to mix in other items, but everything is pretty vanilla. I invest in mutual funds who’s major holdings are Google, Apple, IBM, 3M, etc. Good solid American and International companies that have been around for a while and will continue to be around.
Don’t try to outsmart the market. Most of the time index funds beat their actively managed compatriots. And Warren Buffett thinks Index funds are the way that the average retail investor should invest. If it is good enough for the Oracle of Omaha it is good enough for me.
Simplicity #4: If You Use a Credit Card Only Use One
I don’t know why but it seems like a badge of honor for people to have 10 different credit cards open and balances on every one. Now credit card churning can be an interesting adventure for some people, but for most of us out there there is no need to have more than one credit card. Of course they will try to sell you the benefits of getting coupons and cash back or money off of your purchases, but all that does is make us spend more money in the long run.
I only have one card I use. I have many cards still open, but I haven’t used them in years and they have only been kept open when we were buying a house. Those open credit cards increase my credit score, but I didn’t use them. I don’t even have the cards. I cut them up. I only use one card and I put most of our monthly expenses on the card so that I can get the cash back. I don’t want another card. I don’t need the hassle of keeping track of multiple accounts.
I don’t recommend credit cards at all. In fact, I have gotten in trouble in the past with them, but I think I have righted the ship and I don’t keep a monthly balance on them anymore. I pay it off every month. But if I had multiple cards I would be paying multiple bills and spreading my money too thin. I prefer having one and only one.
Simplicity #5; Focus On One Financial Goal At a Time
I fully admit this is the MOST difficult for me. And I am failing to follow it in my own life. You see I am trying to invest, as well as pay down debt at the same time. And while it is slowly going down you could make the argument that it would go a lot faster if I re-directed some of my retirement savings to my debt load.
There are several reasons I am reluctant to do that. First, contributing to my tax deferred investments reduce my Adjusted Gross Income which saves me in tax bills later on. Second, I like the idea of ramping up my investing savings. I will only have ONE leg to stand on at my retirement and that is my investments. I got started in my retirement savings later on in life and I feel like I am playing catch up. The less I invest, the weaker that one leg is. So my priority is investing and paying off debt with extra work that I do. Third, my debts have such a low interest rate on them that I make more money in the market by putting it there. Fourth, I am mandated to contribute to a retirement account anyway so I figured I would just up those investments. Fifth, I am a flip flopper on this issue. My mind could change tomorrow and I could just barrel through with my investments and get them done faster.
This right here is a case of do as I say, not as I do. I didn’t say what I am doing is smart. In fact, there is a reason why Dave Ramsey is a best selling author and financial guru. He has a simple plan he calls his baby steps that if you stick with can help you achieve financial independence. And each step requires you to focus on that step first and nothing else. Then move up the baby steps. He has sold millions of books and had great success because Dave has found that personal finance isn’t rocket science. It really is about behavior and you have to change your behavior. If you focus on each step along the way you are changing your behavior at the same time.
It is a beautifully simple idea, but it works. For whatever reason I just don’t totally embrace it (yet). But for your own sake, keep it simple. Don’t try to do too many things at once. Focus on one or two items, accomplish that task, and move on to the next.
The Bottom Line
Life is too complicated many times. Money is difficult for many people to talk about, learn about, and change your behavior. That is why just Keep It Simple. Don’t do too many things at once. Invest in what you know about. Be Vanilla and take your time. The tortoise always wins the race. So what do you think? Anymore simple things we should embrace?