Sound principles for financial peace – Monterey Herald
Years ago, I had an epiphany reading “The 7 Habits of Highly Effective People” by Stephen Covey. I recognized that by consistently applying correct principles, I could be an agent, making intentional choices about how I lived my life instead of being an object that was always at the mercy of the forces around me. . I also recognized that Covey’s premise implied that the opposite was also true. If I chose not to follow the right principles, I could not hope to achieve the results I desired. As Covey says, “Principles are like beacons. These are natural laws that cannot be broken. … We can only break against them.
For over 20 years as a financial advisor, I have found that our financial lives reflect a similar dynamic. Whether you’re a Silicon Valley mega-millionaire or an ordinary family just trying to make ends meet, there are certain financial principles that, if followed, will endow you with confidence and financial peace. Violate them, however, and all bets are off. Here are eight financial principles that seem to have the most impact.
1. Learn how money works. Several good books are available. A good place to start is Dave Ramsey’s bestseller “The Total Money Makeover”. My wife and I give this book as a wedding gift to all the young couples we know. I can only imagine their initial reaction when they open it, but many have come back years later to thank us and tell us how this book has changed their lives. I can’t remember ever receiving such a thank you for a toaster oven.
2. Get an education. A good education is an essential basis for a good career. Please note that I am not saying get a college degree. College isn’t for everyone, but whatever your path, get the best education available for what you want to do. If you want to get into the trades, attend the best trade school you can find and get the certificates you need. If you want to go to college, go to the best school you can get into and find the degree that best suits the profession you want.
Once you have completed your formal schooling, become a lifelong learner. Staying up to date with your education will help you stay relevant as the world changes around you. When I was in high school, I told my mother that I worried about how I was going to make a living later. Jobs seemed scarce and competition was fierce. She said, “Remember there’s always room at the top.” Whatever your field of activity, education will help you reach the top.
3. Live within your means. You have more control over your spending than any other aspect of your financial life. Be sure to tailor your lifestyle based on what you actually take home, not what you expect to earn in the future.
4. Avoid debt. Save enough to pay cash for big purchases. If you use credit cards for convenience or security, be sure to pay off your credit cards monthly. A mortgage may be acceptable, as long as it is not too large for your income
5. Pay yourself first. There will always be competing demands for your time and money, so make yourself and your family your top priority. First and foremost, set aside 10% of your earnings for long-term savings, then live on what’s left. The compound interest you earn on the money you save will help your wealth grow at an accelerated rate.
6. Don’t try to pick stocks or time the stock market. It doesn’t work and trying will only add risk to your portfolio. When your friends tell you how much money they made in Tesla or some other hot stock, smile and remember that people never talk about their losers.
7. Diversify your investments by using mutual funds or exchange-traded funds to gain broad exposure to major asset classes. Asset allocation is the most important decision made by an investor. You can do this profitably with mutual funds and exchange-traded funds.
8. Use low-cost, passively managed index funds. Academic research repeatedly confirms that most active managers do not outperform the market and it is very difficult to know in advance who will be the best performers.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes your questions regarding investments, taxes, retirement or estate planning. Send questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to [email protected]