Simplicity almost always beats complexity. Simplicity requires planning, mindfulness and focus. It demands resolve, patience and sometimes benign neglect. Ultimately, simplicity inspires confidence, reduces anxiety and frees our time for more of whatever it is we love. Simplicity is the ultimate sophistication. So says Leonardo Da Vinci, and who am I to argue?
This is true across a wide range of endeavors, including personal finance. From the outside, though, personal finance often seems complex. This is partially a result of a financial advice industry with a vested interest in making thing look intricate, mysterious and difficult. The traditional financial advice industry also likes to hold out the carrot of an easier path to prosperity by suggesting you can “beat the market.” This is nearly impossible, and surely misses the point.
There are thousands of books on personal finance. Search Amazon for “personal finance” books and it returns over 40,000 results. There have been billions (billions!) of words written on personal finance. Some books are truly enlightening (e.g., Sarah Catherine Gutierrez’s book But First, Save 10). When I write my book, though, it’s going to have just 5 words: “spend less than you make.” I’ll put in 300 blank pages and have it leather bound to make it look more impressive, but those 5 words are really all you need to know.
Spending less than you make is A LOT easier said than done of course. When we meet people spending more than they make, the culprit is usually complexity, loss of control and chaos. There was never a plan, bad stuff happened, the financial situation spiraled and it’s hard to recover. The good news is that almost all financial problems are solvable by focusing on simplicity. We encourage folks to distill, streamline and adapt.
At a neighborhood gathering long ago, we were swapping funny stories about our elderly parents when one of my neighbors made a great observation. As we get older, we become a more distilled version of ourselves. It’s funny because it’s true. We all know that our idiosyncrasies will be purified and amplified as we age. It’s not all bad, though, as distillation has many positive aspects. As we age, we increasingly know exactly who we are and what’s important to us. We can separate or reduce aspects of our lives that are inconsistent with our concept of self, leaving our more distilled and focused essence.
To that end, we encourage our clients to establish life goals and priorities. What’s your essence? Who are you now and who do you want to be? How do you want to use money as a tool to accomplish your objectives? The sooner we answer these questions, the easier it is to be true to ourselves. If you’re married, it’s also important to come to an agreement on the goals and priorities for your family.
By distilling ourselves, our families and our lives to the critical elements, we can make better financial decisions. Often this means spending less on “overhead,” meaning homes, cars and other things, while spending more on experiences, like travel, activities and education. There is no right or wrong way to spend money, though, if it’s consistent with your priorities, mindful and, well, legal.
From a financial perspective, the distillation of your goals will often lead you to an appropriate savings rate, which we define as dollars directed toward investments and debt reduction as a percent of your gross pay. We believe that your savings rate is the single most important number in your financial life. We encourage a savings rate of 10%-40% depending on your age, income, net worth and goals. If you’re in your 20s and just want to eventually retire, 10%+ may be fine. If you are in your 30s, 20% may be more appropriate. If you want to retire well, 30% might work better. If you want to retire early, 40% is often necessary.
Once you’ve distilled your life and figured out what’s truly important, you can start streamlining your finances to support your goals. When properly streamlined, finances should recede into the background while you focus on more important things like family, friends, helping others and changing the world.
Start with a plan. It doesn’t have to be much. Any plan is better than no plan. At the least, know how much you spend. For some of us, it would be torturous to track every dollar of spending for the rest of our lives. If you’re in that camp, I get it. Regardless, though, you really need to suck it up and track your spending closely for at least a few months. Importantly, you need to account for spending in three categories: recurring bills, variable spending and episodic spending. Bills are the easiest to track. Variable spending is a little harder and a budgeting app like Mint or YNAB might help. Episodic spending is the most overlooked, so don’t forget to budget for home repairs, periodic car purchases, vacations, out-of-pocket healthcare costs and college tuition.
Automate everything. We’re big proponents of automated cash flow systems. Payroll deduct into a 401(k) and auto-invest into other accounts. Auto-transfer money into savings accounts for episodic expenses. Autopay your bills. Auto-transfer money each week to a 2nd checking account for your variable spending. Once set up and optimized, a cash flow system should take all the drama out of managing your money on a month-to-month basis.
Organize all your financial “stuff” into a 3-ring binder. It should have your will, advance directive, passwords, monthly budget, a list of assets and debts, titles and deeds, recent insurance statements, recent bank statements, recent investment statements and any relevant contact information. Make sure loved ones know where the binder is kept. Update the binder once a year and, if you’re married, cross-train so that both spouses could manage the family’s money if something happened to the other.
While more cringe-worthy than Oscar-worthy, I loved the movie Heartbreak Ridge. Really I just loved Clint Eastwood’s performance as Gunny Highway and his mantra to “improvise, adapt, overcome.” That stuck with me. If you distill and streamline your financial life, there’s still going to be an occasional wrinkle that forces you to improvise, adapt and overcome. Or maybe that wrinkle is just noise and should be ignored. How can we know?
Since I quoted a foul-mouthed fictional Marine, let me atone by quoting a prayer. God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.
What are some financial variables we cannot change? We can’t change the global economy, the stock market, illness, death, accidents and emergencies. How can we achieve a state of serenity to accept those things? We can invest in a mix of stocks and bonds appropriate for our age, income, net worth and risk tolerance. We shouldn’t invest based on our current view of the economy or stock market. We can insure against the risk of death, disability or accidents. We can create an emergency fund. There are forces in our financial life we cannot control, so we plan ahead and go with the flow. You can’t stop the waves, but you can learn how to surf.
What are some financial variables we can change? We can change our spending. We can downsize our home. We can move our kids from private to public schools. We can change our income, maybe with a side gig or moonlighting. We can pay down debt more aggressively or increase our contribution to our 401(k). If we’re in retirement, we can reduce our withdrawal rate.
How can we have the wisdom to know the difference? This is part of the reason automation is so important. We believe you should set it and forget it. Once you’ve distilled and streamlined your financial life, you can mostly forget it. If the stock market is down 40%, the only things you should be changing are your savings rate or withdrawal rate. Everything else is mostly futile. Keep it simple and focus on living your best life.