Financial Hacks for 2019
Take steps now to help this year be your best yet!
Happy New Year everyone! I hope you all enjoyed your holidays and are ready to start working toward your goals for the next 12 months and beyond. Today, I want to talk about a few financial hacks you can put in place and start working on now to set yourself up for success in the months to come.
1. Automate your Finances. Just like that gym membership you forgot that you're still paying for, your savings works the same way (except this time you get the benefit!). I can't tell you enough that "setting it and forgetting it" can work wonders for your bottom line. Need help setting up those auto contributions? Call us!
2. Become a master of your emotions. A large part of financial success comes down to emotions and behavior. Whether you are making minor or major buying decisions, thinking about selling your investments in a market downturn, or just being lazy about setting up a 401(k), having the ability to take a step back and have an outside look at our lives goes a long way towards financial success.
Each and every one of us has been guilty of buying things we don't really need, and that don't provide any long-lasting joy. This is robbing us of our future goals. I am not saying you should feel bad about spending your money, but I am saying to be aware of how emotions play into these decisions, and the long-term effects they have on future financial goals. Just take a second to make sure your spending is aligning with your goals and the things that add lasting joy to your life.
A good example of how emotions can play a part in your investment decisions comes from a conversation I had several months ago with an acquaintance. This person told me that in the past, he'd been saving diligently into a 401(k). Then, the Great Recession hit, and he watched his savings diminish every day. Eventually, he couldn't stomach it anymore, and he moved every dollar he had in that 401(k) to a money market account, and promised himself he would play it "safe" from that point on and never get "burned" in the market again. The fact is, he was more than 30 years from retirement at that point, and was in a position to weather the storm, but he had not mastered his emotions and did not have an advisor to help point him in the right direction. The result was that he has not gotten back into the market, and has missed out on lots of possible gains many investors have seen in the last decade.
3. Understand compound interest and opportunity cost. Einstein once said that "compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't, pays it." A classic example of compound interest is taking a penny and doubling it everyday for a month. The chart below shows that on day 30 your 1 penny would be worth more than $5 million! Now of course I know that this is not realistic for your retirement account, but you get my point. On the other hand, credit cards work the same way, but in the bank's favor instead of yours!
Day 1: $.01 Day 2: $.02 Day 3: $.04 Day 4: $.08 Day 5: $.16 Day 6: $.32 Day 7: $.64 Day 8: $1.28 Day 9: $2.56 Day 10: $5.12 Day 11: $10.24 Day 12: $20.48 Day 13: $40.96 Day 14: $81.92 Day 15: $163.84 Day 16: $327.68 Day 17: $655.36 Day 18: $1,310.72 Day 19: $2,621.44 Day 20: $5,242.88 Day 21: $10,485.76 Day 22: $20,971.52 Day 23: $41,943.04 Day 24: $83,886.08 Day 25: $167,772.16 Day 26: $335,544.32 Day 27: $671,088.64 Day 28: $1,342,177.28 Day 29: $2,684,354.56 Day 30: $5,368,709.12
Then there is opportunity cost. By definition it is the loss of potential gain from other alternatives when only one alternative is chosen. A real life example is when you are shopping for a new car. Say you can buy the new model for $30,000, or a model that is a few years old for $15,000. If you opt for the new model, the opportunity cost is what the additional 15 grand could have compounded into over your lifetime. I'm not saying you should not buy the new model if you truly want it, but if you have a good grasp on compound interest you may think twice before pulling the trigger.
4. Pay yourself first, then increase your lifestyle. Even the most diligent savers can fall into the trap of letting their lifestyle creep up and eventually outpace their savings. With the New Year here, we are getting to the time when many people get their annual raises. Before you go out and upgrade your lifestyle, call your HR department and up your 401(k) contribution by a percent or more, and reevaluate your emergency savings number. This is a fast and simple step you can take that will help to make sure your savings and emergency fund are on track and not getting outpaced by your lifestyle.
My team and I look forward to working with you throughout 2019 and beyond as you work towards your short- and long-term goals. We'll see you soon.