A new columnist for the New York Times kicked off his column by writing about his five basics for building a solid financial future: (1) Investing is simple (2) It still may be worth paying for help (3) Peers may know more than professionals (4) Everything can (and should) be automated and (5) Have the talk. You can check out his column here. The list is similar to Dilbert creator Scott Adams’ simple 9-point formula and Dave Ramsey’s Baby Steps. Here are my five basics for financial success:
Spend less than you earn: If there is only one rule for financial success, it is simply to save money. Unfortunately, there are no shortcuts. The good news though, is that while it takes discipline to establish a savings habit, it is so much easier to keep it going. There are many strategies to save money: some save a percentage of their income and don’t worry about the rest, others budget their spending and plan to save the rest. Our household falls in the former category: we simply try and save one of our incomes and spend the other.
Invest regularly: It’s not enough to simply save money. It’s equally important to invest it wisely. The best investment method that works for everyone is simply invest the regular savings periodically in a diversified portfolio of stocks, bonds, cash and real estate.
Don’t chase performance & Keep costs low: The behaviour that hurts investors the most is chasing performance. It is hard not to be tempted when everyone and their brother-in-law is making a killing in commodities (or insert your “hot” sector or stock du jour here) but it is the surest route to under performance. Investors should also keep costs low by trading very little, keeping taxes low and keeping as much of the returns in the pocket by cutting out the middlemen.
Keep it simple: Lots of people keep four or five bank accounts, a portfolio of credit cards, five brokerage accounts and thirty mutual funds. This makes it hard to track spending, invest savings and maintain asset allocation targets. Investors also seek refuge in complex financial products like the Smith Manoeuvre, principal-protected notes, wrap accounts, flow-through funds etc. De-cluttering their financial life and embracing simplicity helps a great deal in advancing towards our financial goals.
Protect what you have: Far too often, we forget to insure against events that can have a devastating effect on our finances. If we have a family to support, we should get enough life insurance and get our wills done. Medical expenses in foreign countries can get really expensive, so it may make sense to get extra coverage.
Update: MoneySense features editor Duncan Hood shared his steps to financial bliss in the latest issue of the magazine: (1) Pick one goal at a time (2) Small steps make a big difference (3) Make your savings automatic (4) Keep it simple (5) Your home is not an investment (6) Not everyone is a great investor (7) Money isn’t happiness.
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17 responses so far ↓
1 Four Pillars // Jun 1, 2008 at 8:51 pm
Great list - if I can only suggest one tip, it is education. You don’t need to be an expert at investing, budgeting etc but knowledge can help your finances quite a bit.
Mike
2 Cash Canuck // Jun 2, 2008 at 12:21 am
Four Pillars, good point. You may or may not have a professional advisor, but nobody cares more about your money than you do.
3 Jim Somerville // Jun 2, 2008 at 12:43 am
I would add don’t overpay for stuff and do seek value for your money when you do spend it.
4 MillionDollarJourney // Jun 2, 2008 at 6:39 am
Great article CC. The only thing that I would add is to think long term and keep your eye on the big picture.
5 Canadian Capitalist // Jun 2, 2008 at 7:38 am
Mike: Good point. Perhaps, it should be extended to ten points.
Jim & FT: Good points as well. Maybe we should have a meme on this topic as everyone’s list is slightly different.
6 Michael James // Jun 2, 2008 at 11:11 am
Perhaps this falls under “spend less than you earn”, but I would add “pay cash for cars”. I know too many people who trade in one leased car for a shiny new one every few years. This burns a substantial amount of cash.
7 Rob // Jun 2, 2008 at 12:47 pm
I feel your list this 100% accurate and, sadly, too often forgotten in the noise.
8 Rob G // Jun 2, 2008 at 1:19 pm
I do like the lists as it is beneficial/intelligent to keeping your investments to what you understand. Warren Buffet per se. But if you have the aptitude (education as 4P mentioned) for more complex vehicles, then wouldn’t this be apart of that person’s KISS formula.
“(7) Money isn’t happiness.”
I’d just like to say I believe the last (above) statement to be not entirely true. In it’s simplest form money isn’t happiness but neither is sex, marriage or winning the lottery. Dependant on your disposable income, you may or may not have enough left over to enjoy the funner things in life. I’ve gradually had my pay increase every year for the past 7 years from 24000$ to 59000$ a year. Personally I haven’t noticed a great change in my happiness level yet life has been more fun the last couple of years. My increased income has also made it possible to partake in a greater deal of pleasure activities. If today my pay were to fall to lets say 24000$ I think I’d be a wreck. A persons attitude also goes along way. If your a stressed out worrier then no amount of money would help except maybe pay a therapist; how about the A type go getter, would he not be able to afford nicer clothes and better vehicles/houses to demonstrate his ambition and past successes. Money is relative to what you have, have not and what your neighbors/family/friends have and have not.
In my honest opinion money is one of the greatest debates to ever exist.
Take care,
Rob G
9 ThickenMyWallet // Jun 2, 2008 at 2:11 pm
Great list. It ain’t sexy but it is effective (and perhaps that is the key…).
10 Phil S // Jun 2, 2008 at 8:35 pm
Keep it simple: Lots of people keep four or five bank accounts…
I used to believe in that but now I think differently. Keeping a number of bank accounts is a GOOD idea, especially if consolidating everything into a single bank account would create a balance that exceeds the $ amount insured by CDIC. Also, I recently underwent a strange incident several months ago where BMO froze all my bank accounts because their computer detected a potential security breach. I had absolutely no access to ANY of my own money until I could get into a branch and even on my first visit, the computers were down so it took nearly two weeks before I had access to any of my own money - I was buying my lunches with change that I scrounged from the floor of my car and between my sofa cushions! Thankfully I wasn’t travelling somewhere or else I would have REALLY been screwed.
I NOW keep a variety of bank accounts in order to spread around the risk and also to keep my total cash balance in any single account well under the $100K mark. Not to mention in the event of another situation like the one that I had at BMO. It’s a diversification strategy like any other…
Sincerely, Phil
11 Matt // Jun 2, 2008 at 10:50 pm
Good list - getting over the habit to spend more money than you bring in can be an incredibly hard one. But you’re right it does get easier over time (though I’m still mastering it).
12 Rachel @ Master Your Card // Jun 3, 2008 at 9:21 am
I would also add that you need to set a goal - work out what you want to achieve with your finances and why and keep the goal written down. It may even be useful to break it down into smaller steps and most importantly have a deadline.
13 Canadian Capitalist // Jun 3, 2008 at 10:44 am
Michael: Cars are such money pits and many forget that depreciation is one of the major expenses of owning a car and is especially high in the initial years.
Rob, Rob G, Thicken, Matt, Rachel: Good points.
Phil: I guess that is one reason to keep two accounts and keep a bundle of cash at home as part of emergency preparedness.
14 Term Life Insurance PopStar // Jun 3, 2008 at 9:45 pm
These are great tips. I think the easiest is the first (don’t spend more than you make) and the most important is the fifth (protect what you have). Life insurance and other forms of insurance are often things that we overlook. But, especially with prices the way they are today (really low), I would hope that no one overlooks the simplest form of life insurance: term life insurance. It’s easy to get and it’s one of the best ways to protect your family or loved ones against your untimely passing.
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